MBRG-2013.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number: 0-24159
MIDDLEBURG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
|
| |
Virginia (State or other jurisdiction of incorporation or organization) | 54-1696103 (I.R.S. Employer Identification No.) |
111 West Washington Street Middleburg, Virginia (Address of principal executive offices) | 20117 (Zip Code) |
(703) 777-6327
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer ¨ | | Accelerated filer þ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 7,089,091 shares of Common Stock as of October 31, 2013.
MIDDLEBURG FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
|
| | | | | | | |
MIDDLEBURG FINANCIAL CORPORATION |
Consolidated Balance Sheets |
(In thousands, except for share and per share data) |
| (Unaudited) | | |
| September 30, 2013 | | December 31, 2012 |
ASSETS | | | |
Cash and due from banks | $ | 9,417 |
| | $ | 7,139 |
|
Interest-bearing deposits with other institutions | 53,228 |
| | 47,276 |
|
Total cash and cash equivalents | 62,645 |
| | 54,415 |
|
Securities available for sale, at fair value | 328,378 |
| | 319,457 |
|
Loans held for sale | 41,855 |
| | 82,114 |
|
Restricted securities, at cost | 7,005 |
| | 6,990 |
|
Loans receivable, net of allowance for loan losses of $13,382 at September 30, 2013 and $14,311 at December 31, 2012 | 702,724 |
| | 695,166 |
|
Premises and equipment, net | 20,465 |
| | 20,587 |
|
Goodwill and identified intangibles | 5,889 |
| | 6,017 |
|
Other real estate owned, net of valuation allowance of $603 at September 30, 2013 and $1,707 at December 31, 2012 | 4,530 |
| | 9,929 |
|
Prepaid federal deposit insurance | — |
| | 3,015 |
|
Bank owned life insurance | 16,851 |
| | 16,484 |
|
Accrued interest receivable and other assets | 24,985 |
| | 22,607 |
|
TOTAL ASSETS | $ | 1,215,327 |
| | $ | 1,236,781 |
|
LIABILITIES | |
| | |
|
Deposits: | |
| | |
|
Non-interest-bearing demand deposits | $ | 190,680 |
| | $ | 167,137 |
|
Savings and interest-bearing demand deposits | 495,348 |
| | 522,740 |
|
Time deposits | 272,538 |
| | 292,023 |
|
Total deposits | 958,566 |
| | 981,900 |
|
Securities sold under agreements to repurchase | 35,005 |
| | 33,975 |
|
Short-term borrowings | 5,451 |
| | 11,873 |
|
FHLB borrowings | 85,000 |
| | 77,912 |
|
Subordinated notes | 5,155 |
| | 5,155 |
|
Accrued interest payable and other liabilities | 10,967 |
| | 8,844 |
|
Commitments and contingent liabilities | — |
| | — |
|
TOTAL LIABILITIES | 1,100,144 |
| | 1,119,659 |
|
SHAREHOLDERS' EQUITY | |
| | |
|
Common stock ($2.50 par value; 20,000,000 shares authorized, 7,089,091 and 7,052,554 issued and outstanding at September 30, 2013 and December 31, 2012, respectively) | 17,403 |
| | 17,357 |
|
Capital surplus | 44,139 |
| | 43,869 |
|
Retained earnings | 50,063 |
| | 46,235 |
|
Accumulated other comprehensive income | 833 |
| | 6,467 |
|
Total Middleburg Financial Corporation shareholders' equity | 112,438 |
| | 113,928 |
|
Non-controlling interest in consolidated subsidiary | 2,745 |
| | 3,194 |
|
TOTAL SHAREHOLDERS' EQUITY | 115,183 |
| | 117,122 |
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 1,215,327 |
| | $ | 1,236,781 |
|
See accompanying notes to the consolidated financial statements.
|
| | | | | | | | | | | | | | | |
MIDDLEBURG FINANCIAL CORPORATION |
Consolidated Statements of Income |
(In thousands, except for per share data) |
| Unaudited | | Unaudited |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
INTEREST AND DIVIDEND INCOME | | | | | | | |
Interest and fees on loans | $ | 8,744 |
| | $ | 9,189 |
| | $ | 26,504 |
| | $ | 28,565 |
|
Interest and dividends on securities available for sale | |
| | |
| | |
| | |
|
Taxable | 1,468 |
| | 1,537 |
| | 4,467 |
| | 4,976 |
|
Tax-exempt | 640 |
| | 596 |
| | 1,917 |
| | 1,799 |
|
Dividends | 59 |
| | 46 |
| | 169 |
| | 135 |
|
Interest on deposits in banks and federal funds sold | 43 |
| | 39 |
| | 101 |
| | 88 |
|
Total interest and dividend income | 10,954 |
| | 11,407 |
| | 33,158 |
| | 35,563 |
|
INTEREST EXPENSE | |
| | |
| | |
| | |
|
Interest on deposits | 1,190 |
| | 1,728 |
| | 3,817 |
| | 5,467 |
|
Interest on securities sold under agreements to repurchase | 82 |
| | 83 |
| | 243 |
| | 250 |
|
Interest on short-term borrowings | 59 |
| | 74 |
| | 106 |
| | 311 |
|
Interest on FHLB borrowings and other debt | 303 |
| | 305 |
| | 896 |
| | 889 |
|
Total interest expense | 1,634 |
| | 2,190 |
| | 5,062 |
| | 6,917 |
|
NET INTEREST INCOME | 9,320 |
| | 9,217 |
| | 28,096 |
| | 28,646 |
|
Provision for (recovery of) loan losses | 3 |
| | 635 |
| | (1 | ) | | 2,156 |
|
NET INTEREST INCOME AFTER PROVISION | |
| | |
| | |
| | |
|
FOR (RECOVERY OF) LOAN LOSSES | 9,317 |
| | 8,582 |
| | 28,097 |
| | 26,490 |
|
NON-INTEREST INCOME | |
| | |
| | |
| | |
|
Service charges on deposit accounts | 590 |
| | 557 |
| | 1,699 |
| | 1,625 |
|
Trust services income | 963 |
| | 928 |
| | 2,937 |
| | 2,828 |
|
Gains on loans held for sale | 4,162 |
| | 6,161 |
| | 12,538 |
| | 15,088 |
|
Gains on securities available for sale, net | 23 |
| | 164 |
| | 397 |
| | 452 |
|
Total other-than-temporary impairment losses | — |
| | — |
| | — |
| | (46 | ) |
Portion of loss recognized in other comprehensive income | — |
| | — |
| | — |
| | 46 |
|
Net impairment losses | — |
| | — |
| | — |
| | — |
|
Commissions on investment sales | 159 |
| | 117 |
| | 363 |
| | 389 |
|
Fees on mortgages held for sale | 28 |
| | 37 |
| | 103 |
| | 143 |
|
Bank owned life insurance | 125 |
| | 118 |
| | 367 |
| | 363 |
|
Other operating income | 78 |
| | 236 |
| | 732 |
| | 585 |
|
Total non-interest income | 6,128 |
| | 8,318 |
| | 19,136 |
| | 21,473 |
|
NON-INTEREST EXPENSE | |
| | |
| | |
| | |
|
Salaries and employee benefits | 7,750 |
| | 7,276 |
| | 23,242 |
| | 22,139 |
|
Net occupancy and equipment expense | 1,820 |
| | 1,732 |
| | 5,412 |
| | 5,265 |
|
Advertising | 318 |
| | 652 |
| | 1,021 |
| | 1,399 |
|
Computer operations | 456 |
| | 322 |
| | 1,375 |
| | 1,101 |
|
Other real estate owned | 416 |
| | 1,506 |
| | 1,377 |
| | 2,666 |
|
Other taxes | 186 |
| | 203 |
| | 565 |
| | 611 |
|
Federal deposit insurance expense | 149 |
| | 262 |
| | 683 |
| | 781 |
|
Other operating expenses | 2,210 |
| | 1,883 |
| | 6,666 |
| | 6,501 |
|
Total non-interest expense | 13,305 |
| | 13,836 |
| | 40,341 |
| | 40,463 |
|
Income before income taxes | 2,140 |
| | 3,064 |
| | 6,892 |
| | 7,500 |
|
Income tax expense | 491 |
| | 565 |
| | 1,628 |
| | 1,578 |
|
NET INCOME | 1,649 |
| | 2,499 |
| | 5,264 |
| | 5,922 |
|
Net income attributable to non-controlling interest | (38 | ) | | (785 | ) | | (233 | ) | | (856 | ) |
Net income attributable to Middleburg Financial Corporation | $ | 1,611 |
| | $ | 1,714 |
| | $ | 5,031 |
| | $ | 5,066 |
|
Earnings per share: | |
| | |
| | |
| | |
|
Basic | $ | 0.23 |
| | $ | 0.24 |
| | $ | 0.71 |
| | $ | 0.72 |
|
Diluted | $ | 0.23 |
| | $ | 0.24 |
| | $ | 0.71 |
| | $ | 0.72 |
|
Dividends per common share | $ | 0.07 |
| | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.15 |
|
See accompanying notes to the consolidated financial statements.
|
| | | | | | | | | | | | | | | |
MIDDLEBURG FINANCIAL CORPORATION |
Consolidated Statements of Comprehensive Income (Loss) |
(In thousands) |
| Unaudited | | Unaudited |
| For the Three Months Ended | | For the Nine Months Ended |
| September 30, | | September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | |
Net income | $ | 1,649 |
| | $ | 2,499 |
| | $ | 5,264 |
| | $ | 5,922 |
|
Other comprehensive income (loss), net of tax: | |
| | |
| | |
| | |
|
Unrealized holding gains (losses) arising during the period (net of tax of $902, $673, $2,870 and $1,421 respectively for the periods presented) | (1,748 | ) | | 1,307 |
| | (5,572 | ) | | 2,758 |
|
Reclassification adjustment for gains included in net income (net of tax of $8, $56, $135, and $154 respectively for the periods presented) | (15 | ) | | (108 | ) | | (262 | ) | | (298 | ) |
Unrealized gain (loss) on interest rate swap (net of tax of $2, $18, $103, and $63, respectively) | (4 | ) | | (35 | ) | | 200 |
| | (122 | ) |
Total other comprehensive income (loss) | (1,767 | ) | | 1,164 |
| | (5,634 | ) | | 2,338 |
|
Total comprehensive income (loss) | (118 | ) | | 3,663 |
| | (370 | ) | | 8,260 |
|
Comprehensive income attributable to non-controlling interest | (38 | ) | | (785 | ) | | (233 | ) | | (856 | ) |
Comprehensive income (loss) attributable to Middleburg Financial Corporation | $ | (156 | ) | | $ | 2,878 |
| | $ | (603 | ) | | $ | 7,404 |
|
See accompanying notes to the consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Middleburg Financial Corporation |
Consolidated Statements of Changes in Shareholders' Equity |
For the Nine Months Ended September 30, 2013 and 2012 |
(In Thousands, Except Share Data) |
(Unaudited) |
| Middleburg Financial Corporation Shareholders | | | |
| Common Stock | | Capital Surplus | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-controlling Interest | | Total |
Balances - December 31, 2011 | $ | 17,331 |
| | $ | 43,498 |
| | $ | 41,157 |
| | $ | 3,926 |
| | $ | 2,101 |
| | $ | 108,013 |
|
Net income | |
| | |
| | 5,066 |
| | |
| | 856 |
| | 5,922 |
|
Other comprehensive income, net of tax | |
| | |
| | |
| | 2,338 |
| | |
| | 2,338 |
|
Cash dividends declared | |
| | |
| | (1,055 | ) | | |
| | |
| | (1,055 | ) |
Vesting of restricted stock awards (12,432 shares) | 33 |
| | (33 | ) | | |
| | |
| | |
| | — |
|
Repurchase of restricted stock (2,736 shares) | (7 | ) | | (36 | ) | | | | | | | | (43 | ) |
Distributions to non-controlling interest | | | | | |
| | |
| | (59 | ) | | (59 | ) |
Share-based compensation | | | 317 |
| | |
| | |
| | |
| | 317 |
|
Balances - September 30, 2012 | $ | 17,357 |
| | $ | 43,746 |
| | $ | 45,168 |
| | $ | 6,264 |
| | $ | 2,898 |
| | $ | 115,433 |
|
| | | | | | | | | | | |
Balances - December 31, 2012 | $ | 17,357 |
| | $ | 43,869 |
| | $ | 46,235 |
| | $ | 6,467 |
| | $ | 3,194 |
| | $ | 117,122 |
|
Net income | |
| | |
| | 5,031 |
| | |
| | 233 |
| | 5,264 |
|
Other comprehensive loss, net of tax | |
| | |
| | |
| | (5,634 | ) | | |
| | (5,634 | ) |
Cash dividends declared | |
| | |
| | (1,203 | ) | | |
| | |
| | (1,203 | ) |
Exercise of stock options (2,743 shares) | 7 |
| | 31 |
| | | | | | | | 38 |
|
Vesting of restricted stock awards (21,455 shares) | 53 |
| | (53 | ) | | |
| | |
| | |
| | — |
|
Repurchase of restricted stock (5,467 shares) | (14 | ) | | (88 | ) | | |
| | |
| | |
| | (102 | ) |
Distributions to non-controlling interest | |
| | |
| | |
| | |
| | (682 | ) | | (682 | ) |
Share-based compensation |
|
| | 380 |
| | |
| | |
| | |
| | 380 |
|
Balances - September 30, 2013 | $ | 17,403 |
| | $ | 44,139 |
| | $ | 50,063 |
| | $ | 833 |
| | $ | 2,745 |
| | $ | 115,183 |
|
See accompanying notes to the consolidated financial statements.
|
| | | | | | | |
MIDDLEBURG FINANCIAL CORPORATION |
Consolidated Statements of Cash Flows |
(In thousands) |
| Unaudited |
| For the nine months ended |
| September 30, 2013 | | September 30, 2012 |
Cash Flows From Operating Activities | | | |
Net income | $ | 5,264 |
| | $ | 5,922 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 1,466 |
| | 1,442 |
|
Undistributed earnings of affiliate | (202 | ) | | (4 | ) |
Provision for (recovery of) loan losses | (1 | ) | | 2,156 |
|
Net gain on securities available for sale | (397 | ) | | (452 | ) |
Net loss on disposal of assets | 141 |
| | 8 |
|
Premium amortization on securities, net | 2,764 |
| | 2,765 |
|
Origination of loans held for sale | (590,369 | ) | | (696,327 | ) |
Proceeds from sales of loans held for sale | 643,166 |
| | 711,428 |
|
Net gains on mortgages held for sale | (12,538 | ) | | (15,088 | ) |
Share-based compensation | 380 |
| | 317 |
|
Net loss on sale of other real estate owned | 747 |
| | 128 |
|
Valuation adjustment on other real estate owned | 235 |
| | 1,616 |
|
Decrease in prepaid FDIC insurance | 3,015 |
| | 727 |
|
Changes in other assets and liabilities: | |
| | |
|
Decrease (increase) in other assets | 129 |
| | (1,081 | ) |
Increase in other liabilities | 2,123 |
| | 696 |
|
Net cash provided by operating activities | $ | 55,923 |
| | $ | 14,253 |
|
Cash Flows from Investing Activities | |
| | |
|
Proceeds from maturity, principal paydowns and calls of securities available for sale | $ | 70,540 |
| | $ | 71,036 |
|
Proceeds from sale of securities available for sale | 12,713 |
| | 39,475 |
|
Purchase of securities available for sale | (103,380 | ) | | (109,228 | ) |
Purchase of restricted stock | (15 | ) | | 352 |
|
Purchases of bank premises and equipment | (1,273 | ) | | (541 | ) |
Net increase in loans | (9,946 | ) | | (31,091 | ) |
Proceeds from sale of other real estate owned | 6,806 |
| | 2,126 |
|
Net cash used in investing activities | $ | (24,555 | ) | | $ | (27,871 | ) |
Cash Flows from Financing Activities | | | |
Net (decrease) increase in non-interest-bearing and interest-bearing demand deposits and savings accounts | $ | (3,849 | ) | | $ | 85,328 |
|
Net (decrease) in time deposits | (19,485 | ) | | (30,750 | ) |
Increase in securities sold under agreements to repurchase | 1,030 |
| | 1,081 |
|
Decrease in short-term borrowings | (6,422 | ) | | (10,674 | ) |
Increase (decrease) in FHLB borrowings | 7,088 |
| | (10,000 | ) |
Distributions to non-controlling interest | (233 | ) | | (59 | ) |
Payment of dividends on common stock | (1,203 | ) | | (1,055 | ) |
Issuance of common stock | 38 |
| | — |
|
Repurchase of common stock | (102 | ) | | — |
|
Net cash (used in) provided by financing activities | $ | (23,138 | ) | | $ | 33,871 |
|
Increase in cash and and cash equivalents | 8,230 |
| | 20,253 |
|
Cash and Cash Equivalents | |
| | |
|
Beginning | 54,415 |
| | 51,270 |
|
Ending | $ | 62,645 |
| | $ | 71,523 |
|
Supplemental Disclosures of Cash Flow Information | |
| | |
|
Cash payments for: | |
| | |
|
Interest | $ | 5,189 |
| | $ | 7,080 |
|
Income taxes | $ | — |
| | $ | 1,850 |
|
Supplemental Disclosure of Non-cash Transactions | |
| | |
|
Unrealized gain (loss) on securities available for sale | $ | (8,839 | ) | | $ | 3,727 |
|
Change in market value of interest rate swap | $ | 303 |
| | $ | (185 | ) |
Transfer of loans to other real estate owned | $ | 2,389 |
| | $ | 7,431 |
|
Loans originated from sale of other real estate owned | $ | — |
| | $ | 149 |
|
See Accompanying Notes to Consolidated Financial Statements.
MIDDLEBURG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2013
(Unaudited)
In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2013 and December 31, 2012, the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012, and changes in shareholders’ equity and cash flows for the nine months ended September 30, 2013 and 2012, in accordance with accounting principles generally accepted in the United States of America. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) of Middleburg Financial Corporation (the “Company”). The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.
In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has concluded there were no additional material subsequent events to be disclosed.
Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation. The amounts of these items are not considered to be material variations from the original classifications and presentations.
| |
Note 2. | Share–Based Compensation |
As of September 30, 2013, the Company sponsored one share-based compensation plan (the 2006 Equity Compensation Plan), which provides for the granting of stock options, stock appreciation rights, stock awards, performance share awards, incentive awards and stock units. The 2006 Equity Compensation Plan was approved by the Company’s shareholders at the Annual Meeting held on April 26, 2006 and has succeeded the Company’s 1997 Stock Incentive Plan. The 2006 Equity Compensation plan was amended by the Company's shareholders at the Annual Meeting held on May 1, 2013 to increase the total number of shares which may be awarded. Under the plan, the Company may grant share-based compensation to its directors, officers, employees and other persons the Company determines have contributed to the profits or growth of the Company. The Company may grant awards of up to 430,000 shares of common stock under the 2006 Equity Compensation Plan as amended.
The Company recognized $380,000 of share-based compensation expenses for the nine months ended September 30, 2013.
The following table summarizes stock options awarded under the 2006 Equity Compensation Plan and remaining unexercised options under the 1997 Stock Incentive Plan at the end of the reporting period.
|
| | | | | | | | | | |
| September 30, 2013 |
| Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
Outstanding at beginning of year | 82,171 |
| | $ | 17.32 |
| | |
Granted | — |
| | — |
| | |
Exercised | (2,743 | ) | | 14.00 |
| | |
Forfeited | (16,000 | ) | | 22.00 |
| | |
Outstanding at end of period | 63,428 |
| | $ | 16.29 |
| | $ | 182,000 |
|
As of the end of the reporting period, 63,428 options were vested and exercisable representing 6,000 shares issued under the original 1997 plan and 57,428 vested options under the 2006 Plan. As of September 30, 2013, no outstanding options were unvested.
The weighted average remaining contractual term for options outstanding and exercisable at September 30, 2013 was 5.01 years. As of September 30, 2013, all compensation expense related to stock option awards has been recognized. The Aggregate Intrinsic Value above represents the difference between the market value of the stock at the end of the period and the weighted average exercise price of the options at the end of the period.
The following table summarizes restricted stock awarded under the 2006 Equity Compensation Plan at the end of the reportable period.
|
| | | | | | | | | | |
| September 30, 2013 |
| Shares | | Weighted Average Grant-Date Fair Value | | Aggregate Intrinsic Value |
Outstanding at beginning of year | 120,455 |
| | $ | 15.66 |
| | |
Granted | 32,500 |
| | 17.96 |
| | |
Vested | (21,455 | ) | | (14.72 | ) | | |
Forfeited | (3,750 | ) | | (16.85 | ) | | |
Non-vested at end of period | 127,750 |
| | $ | 16.36 |
| | $ | 2,463,000 |
|
The weighted average remaining contractual term for non-vested restricted stock at September 30, 2013 was 4.07years. As of September 30, 2013, there was approximately $1.6 million of total unrecognized compensation expense related to non-vested restricted stock awards under the 2006 Equity Compensation Plan.
Amortized costs and fair values of securities available for sale at September 30, 2013 are summarized as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In Thousands) |
Available for Sale | | | | | | | |
U.S. government agencies | $ | 21,360 |
| | $ | 349 |
| | $ | (244 | ) | | $ | 21,465 |
|
Obligations of states and political subdivisions | 77,788 |
| | 1,483 |
| | (3,167 | ) | | 76,104 |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
Agency | 158,204 |
| | 3,864 |
| | (1,013 | ) | | 161,055 |
|
Non-agency | 18,113 |
| | 151 |
| | (141 | ) | | 18,123 |
|
Other asset backed securities | 35,728 |
| | 659 |
| | (150 | ) | | 36,237 |
|
Corporate preferred stock | 68 |
| | 5 |
| | — |
| | 73 |
|
Corporate securities | 15,695 |
| | 32 |
| | (406 | ) | | 15,321 |
|
Total | $ | 326,956 |
| | $ | 6,543 |
| | $ | (5,121 | ) | | $ | 328,378 |
|
Amortized costs and fair values of securities available for sale at December 31, 2012 are summarized as follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2012 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In Thousands) |
Available for Sale | | | | | | | |
U.S. government agencies | $ | 15,391 |
| | $ | 459 |
| | $ | (28 | ) | | $ | 15,822 |
|
Obligations of states and political subdivisions | 74,485 |
| | 3,920 |
| | (105 | ) | | 78,300 |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
Agency | 161,564 |
| | 5,659 |
| | (280 | ) | | 166,943 |
|
Non-agency | 15,310 |
| | 287 |
| | (18 | ) | | 15,579 |
|
Other asset backed securities | 33,648 |
| | 1,079 |
| | (85 | ) | | 34,642 |
|
Corporate preferred stock | 68 |
| | — |
| | (6 | ) | | 62 |
|
Corporate securities | 8,730 |
| | 12 |
| | (633 | ) | | 8,109 |
|
Total | $ | 309,196 |
| | $ | 11,416 |
| | $ | (1,155 | ) | | $ | 319,457 |
|
The amortized cost and fair value of securities available for sale as of September 30, 2013, by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed, other asset-backed, and corporate securities because the mortgages, loans, and securities underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.
|
| | | | | | | |
| September 30, 2013 |
| Amortized Cost | | Fair Value |
| (In thousands) |
Due in one year or less | $ | 2,520 |
| | $ | 2,555 |
|
Due after one year through five years | 38,469 |
| | 39,035 |
|
Due after one year through ten years | 29,434 |
| | 28,617 |
|
Due after ten years | 44,420 |
| | 42,683 |
|
Mortgage-backed securities | 176,317 |
| | 179,178 |
|
Other asset backed securities | 35,728 |
| | 36,237 |
|
Corporate preferred stock | 68 |
| | 73 |
|
Total | $ | 326,956 |
| | $ | 328,378 |
|
Proceeds from the sale of securities during the nine months ended September 30, 2013 were $12.7 million and net gains of $397,000 were realized on those sales. The tax expense applicable to the net realized gains amounted to $135,000. Additionally, no loss on securities with other than temporary impairment was recognized during the nine months ended September 30, 2013.
The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies and for other purposes as required by law amounted to $104.5 million at September 30, 2013.
At September 30, 2013, investments in an unrealized loss position that were temporarily impaired are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | | | (In thousands) | | |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
U.S. government agencies | | $ | 11,019 |
| | $ | (244 | ) | | $ | 82 |
| | $ | — |
| | $ | 11,101 |
| | $ | (244 | ) |
Obligations of states and | | |
| | |
| | |
| | |
| | |
| | |
|
political subdivisions | | 29,161 |
| | (3,129 | ) | | 847 |
| | (38 | ) | | 30,008 |
| | (3,167 | ) |
Mortgage backed securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Agency | | 37,619 |
| | (878 | ) | | 5,256 |
| | (135 | ) | | 42,875 |
| | (1,013 | ) |
Non-agency | | 3,938 |
| | (81 | ) | | 1,354 |
| | (60 | ) | | 5,292 |
| | (141 | ) |
Other asset backed securities | | 1,592 |
| | (42 | ) | | 2,284 |
| | (108 | ) | | 3,876 |
| | (150 | ) |
Corporate securities | | 5,656 |
| | (167 | ) | | 4,261 |
| | (239 | ) | | 9,917 |
| | (406 | ) |
Total | | $ | 88,985 |
| | $ | (4,541 | ) | | $ | 14,084 |
| | $ | (580 | ) | | $ | 103,069 |
| | $ | (5,121 | ) |
At December 31, 2012, investments in an unrealized loss position that were temporarily impaired are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2012 |
| | | | (In thousands) | | |
| | Less than Twelve Months | | Twelve Months or Greater | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
U.S. government agencies | | $ | 3,850 |
| | $ | (28 | ) | | $ | 16 |
| | $ | — |
| | $ | 3,866 |
| | $ | (28 | ) |
Obligations of states and | | |
| | |
| | |
| | |
| | |
| | |
|
political subdivisions | | 6,966 |
| | (105 | ) | | — |
| | — |
| | 6,966 |
| | (105 | ) |
Mortgage backed securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Agency | | 24,344 |
| | (234 | ) | | 1,241 |
| | (46 | ) | | 25,585 |
| | (280 | ) |
Non-agency | | 3,295 |
| | (18 | ) | | — |
| | — |
| | 3,295 |
| | (18 | ) |
Other asset backed securities | | 2,791 |
| | (57 | ) | | 1,418 |
| | (28 | ) | | 4,209 |
| | (85 | ) |
Corporate preferred stock | | — |
| | — |
| | 33 |
| | (6 | ) | | 33 |
| | (6 | ) |
Corporate securities | | — |
| | — |
| | 6,867 |
| | (633 | ) | | 6,867 |
| | (633 | ) |
Total | | $ | 41,246 |
| | $ | (442 | ) | | $ | 9,575 |
| | $ | (713 | ) | | $ | 50,821 |
| | $ | (1,155 | ) |
A total of 117 securities were identified by the Company as temporarily impaired at September 30, 2013. Of the 117 securities, 116 were investment grade and 1 was speculative grade. Agency, non-agency mortgage-backed securities, municipal and corporate
debt securities make up the majority of temporarily impaired securities at September 30, 2013. The speculative grade security was a municipal bond. During the nine months ended September 30, 2013, the municipal bond sector, which is included in the Company's obligations of states and political subdivisions category of securities, and securities of U.S. government agencies and corporations experienced falling securities prices as improvement in select U.S. economic indicators and statements made by certain Federal Reserve officials raised concerns that the Federal Reserve would reduce its efforts to stimulate economic recovery through its bond-buying program known as "quantitative easing." Interest rates rose during this period, causing corresponding unrealized losses on the Company's portfolio of securities of U.S. government agencies and corporations and obligations of states and political subdivisions. Although the Company has the ability to hold these securities until the temporary loss is recovered, decisions by management may necessitate a sale before the loss is fully recovered. No such sales are anticipated or required as of September 30, 2013. Investment decisions reflect the strategic asset/liability objectives of the Company.
Trust preferred securities
As of September 30, 2013, the Company held no trust preferred securities in its investment portfolio.
The Company previously held trust preferred securities that were identified as other-than-temporarily impaired. These securities were sold during the second quarter of 2012 with a recognized net loss of approximately $142,000. Additionally, these securities incurred cumulative other-than-temporary credit losses recognized in prior period earnings of approximately $2.4 million through December 31, 2011.
The Company also previously owned one trust preferred security that was not considered other-than-temporarily impaired while held in its investment portfolio. This security was sold during the third quarter of 2012 with a recognized net loss of approximately $149,000. No credit losses were recognized by the Company for this security.
Other-than-temporary impairment losses
At September 30, 2013, the Company concluded that no adverse changes in cash flows occurred during the quarter and did not consider any portfolio securities to be other-than-temporarily impaired. Based on this analysis and because the Company does not intend to sell securities prior to maturity and it is more likely than not that the Company will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Company does not consider the investments in these assets to be other than temporarily impaired at September 30, 2013. However, there is a risk that the Company’s continuing reviews could result in recognition of other-than-temporary impairment charges in the future. During the nine months ended September 30, 2013 and the nine months ended September 30, 2012, no credit related impairment losses were recognized by the Company.
The Company segregates its loan portfolio into three primary loan segments: Real Estate Loans, Commercial Loans, and Consumer Loans. Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans. Other real estate loans include commercial real estate loans. The consolidated loan portfolio was composed of the following on the dates indicated:
|
| | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| Outstanding Balance | | Percent of Total Portfolio | | Outstanding Balance | | Percent of Total Portfolio |
| (In Thousands) | | | | (In Thousands) | | |
Real estate loans: | | | | | | | |
Construction | $ | 37,155 |
| | 5.2 | % | | $ | 50,218 |
| | 7.1 | % |
Secured by farmland | 11,504 |
| | 1.6 | % | | 11,876 |
| | 1.7 | % |
Secured by 1-4 family residential | 269,986 |
| | 37.7 | % | | 260,620 |
| | 36.7 | % |
Other real estate loans | 261,095 |
| | 36.5 | % | | 254,930 |
| | 35.9 | % |
Commercial loans | 123,285 |
| | 17.2 | % | | 118,573 |
| | 16.8 | % |
Consumer loans | 13,081 |
| | 1.8 | % | | 13,260 |
| | 1.8 | % |
| 716,106 |
| | 100.0 | % | | 709,477 |
| | 100.0 | % |
Less allowance for loan losses | 13,382 |
| | |
| | 14,311 |
| | |
|
Net loans | $ | 702,724 |
| | |
| | $ | 695,166 |
| | |
|
Loans presented in the table above exclude loans held for sale. The Company had $41.9 million in mortgages held for sale at September 30, 2013 and $82.1 million at December 31, 2012.
The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2013 and December 31, 2012.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| | | | | (In thousands) | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days Or Greater | | Total Past Due | | Current | | Total Loans |
Real estate loans: | | | | | | | | | | | |
Construction | $ | 174 |
| | $ | — |
| | $ | 935 |
| | $ | 1,109 |
| | $ | 36,046 |
| | $ | 37,155 |
|
Secured by farmland | — |
| | — |
| | — |
| | — |
| | 11,504 |
| | 11,504 |
|
Secured by 1-4 family residential | 940 |
| | 396 |
| | 1,604 |
| | 2,940 |
| | 267,046 |
| | 269,986 |
|
Other real estate loans | 576 |
| | — |
| | 4,068 |
| | 4,644 |
| | 256,451 |
| | 261,095 |
|
Commercial loans | 118 |
| | — |
| | 55 |
| | 173 |
| | 123,112 |
| | 123,285 |
|
Consumer loans | 7 |
| | 9 |
| | 38 |
| | 54 |
| | 13,027 |
| | 13,081 |
|
Total | $ | 1,815 |
| | $ | 405 |
| | $ | 6,700 |
| | $ | 8,920 |
| | $ | 707,186 |
| | $ | 716,106 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| | | | | (In thousands) | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days Or Greater | | Total Past Due | | Current | | Total Loans |
Real estate loans: | | | | | | | | | | | |
Construction | $ | — |
| | $ | 108 |
| | $ | 2,043 |
| | $ | 2,151 |
| | $ | 48,067 |
| | $ | 50,218 |
|
Secured by farmland | 415 |
| | — |
| | — |
| | 415 |
| | 11,461 |
| | 11,876 |
|
Secured by 1-4 family residential | 1,625 |
| | 568 |
| | 1,910 |
| | 4,103 |
| | 256,517 |
| | 260,620 |
|
Other real estate loans | 197 |
| | 361 |
| | 6,112 |
| | 6,670 |
| | 248,260 |
| | 254,930 |
|
Commercial loans | — |
| | 44 |
| | 144 |
| | 188 |
| | 118,385 |
| | 118,573 |
|
Consumer loans | 27 |
| | 10 |
| | 32 |
| | 69 |
| | 13,191 |
| | 13,260 |
|
Total | $ | 2,264 |
| | $ | 1,091 |
| | $ | 10,241 |
| | $ | 13,596 |
| | $ | 695,881 |
| | $ | 709,477 |
|
The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of September 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| Non-accrual | | Past due 90 days or more and still accruing | | Non-accrual | | Past due 90 days or more and still accruing |
| (In Thousands) |
Real estate loans: | | | | | | | |
Construction | $ | 2,629 |
| | $ | 400 |
| | $ | 2,861 |
| | $ | 780 |
|
Secured by 1-4 family residential | 9,768 |
| | 227 |
| | 8,761 |
| | 228 |
|
Other real estate loans | 6,236 |
| | — |
| | 7,866 |
| | — |
|
Commercial loans | 1,862 |
| | — |
| | 2,146 |
| | 34 |
|
Consumer loans | 30 |
| | 9 |
| | 30 |
| | 2 |
|
Total | $ | 20,525 |
| | $ | 636 |
| | $ | 21,664 |
| | $ | 1,044 |
|
If interest on non-accrual loans had been accrued, such income would have approximated $839,000 for the nine months ended September 30, 2013 and $1.35 million for the year ended December 31, 2012.
The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio. Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, “Doubtful” and “Loss”.
Special Mention: Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.
Substandard: Loans classified as substandard have a well-defined weakness that jeopardizes the liquidation of the debt. Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.
Doubtful: Loans classified as doubtful have a very high possibility of loss. However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status can be determined.
Loss: Loans are classified as loss when they are deemed uncollectible and are charged off immediately.
The following tables present a summary of loan classifications by class of loan as of September 30, 2013 and December 31, 2012: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| | | | | (In Thousands) | | | | |
| Real Estate Construction | | Real Estate Secured by Farmland | | Real Estate Secured by 1-4 Family Residential | | Other Real Estate Loans | | Commercial | | Consumer | | Total |
Pass | $ | 31,061 |
| | $ | 2,994 |
| | $ | 249,447 |
| | $ | 236,543 |
| | $ | 119,731 |
| | $ | 12,980 |
| | $ | 652,756 |
|
Special Mention | 2,363 |
| | 7,903 |
| | 2,488 |
| | 12,291 |
| | 951 |
| | 12 |
| | 26,008 |
|
Substandard | 3,171 |
| | 607 |
| | 16,053 |
| | 12,261 |
| | 2,489 |
| | 59 |
| | 34,640 |
|
Doubtful | 560 |
| | — |
| | 1,998 |
| | — |
| | 114 |
| | 30 |
| | 2,702 |
|
Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Ending Balance | $ | 37,155 |
| | $ | 11,504 |
| | $ | 269,986 |
| | $ | 261,095 |
| | $ | 123,285 |
| | $ | 13,081 |
| | $ | 716,106 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| | | | | (In thousands) | | | | |
| Real Estate Construction | | Real Estate Secured by Farmland | | Real Estate Secured by 1-4 Family Residential | | Other Real Estate Loans | | Commercial | | Consumer | | Total |
Pass | $ | 29,741 |
| | $ | 11,068 |
| | $ | 237,121 |
| | $ | 228,052 |
| | $ | 112,298 |
| | $ | 13,134 |
| | $ | 631,414 |
|
Special Mention | 15,540 |
| | 199 |
| | 3,767 |
| | 12,949 |
| | 3,332 |
| | 47 |
| | 35,834 |
|
Substandard | 3,902 |
| | 609 |
| | 18,333 |
| | 12,887 |
| | 2,831 |
| | 49 |
| | 38,611 |
|
Doubtful | 1,035 |
| | — |
| | 1,399 |
| | 1,042 |
| | 112 |
| | 30 |
| | 3,618 |
|
Loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Ending Balance | $ | 50,218 |
| | $ | 11,876 |
| | $ | 260,620 |
| | $ | 254,930 |
| | $ | 118,573 |
| | $ | 13,260 |
| | $ | 709,477 |
|
The following table presents loans identified as impaired by class of loan as of and for the nine months ended September 30, 2013: |
| | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| | | (In thousands) | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
Construction | $ | 1,910 |
| | $ | 2,187 |
| | $ | — |
| | $ | 1,927 |
| | $ | 13 |
|
Secured by farmland | — |
| | — |
| | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 4,363 |
| | 4,840 |
| | — |
| | 4,664 |
| | 6 |
|
Other real estate loans | 4,347 |
| | 4,581 |
| | — |
| | 4,421 |
| | 111 |
|
Commercial loans | 2,132 |
| | 2,139 |
| | — |
| | 2,275 |
| | 19 |
|
Consumer loans | — |
| | — |
| | — |
| | — |
| | — |
|
Total with no related allowance | 12,752 |
| | 13,747 |
| | — |
| | 13,287 |
| | 149 |
|
| | | | | | | | | |
With an allowance recorded: | |
| | |
| | |
| | |
| | |
|
Real estate loans: | |
| | |
| | |
| | |
| | |
|
Construction | 987 |
| | 1,037 |
| | 508 |
| | 1,016 |
| | — |
|
Secured by farmland | — |
| | — |
| | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 6,477 |
| | 6,707 |
| | 2,904 |
| | 6,644 |
| | 51 |
|
Other real estate loans | 4,995 |
| | 5,288 |
| | 830 |
| | 5,077 |
| | 71 |
|
Commercial loans | 373 |
| | 403 |
| | 285 |
| | 408 |
| | 10 |
|
Consumer loans | 30 |
| | 30 |
| | 30 |
| | 30 |
| | — |
|
Total with a related allowance | 12,862 |
| | 13,465 |
| | 4,557 |
| | 13,175 |
| | 132 |
|
Total | $ | 25,614 |
| | $ | 27,212 |
| | $ | 4,557 |
| | $ | 26,462 |
| | $ | 281 |
|
The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2012:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| | | (In thousands) | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | |
Real estate loans: | | | | | | | | | |
Construction | $ | 1,819 |
| | $ | 2,370 |
| | $ | — |
| | $ | 2,543 |
| | $ | — |
|
Secured by farmland | — |
| | — |
| | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 3,248 |
| | 3,667 |
| | — |
| | 3,712 |
| | 50 |
|
Other real estate loans | 3,135 |
| | 3,178 |
| | — |
| | 3,141 |
| | 91 |
|
Commercial loans | 1,947 |
| | 1,947 |
| | — |
| | 1,924 |
| | — |
|
Consumer loans | — |
| | — |
| | — |
| | — |
| | — |
|
Total with no related allowance | 10,149 |
| | 11,162 |
| | — |
| | 11,320 |
| | 141 |
|
| | | | | | | | | |
With an allowance recorded: | |
| | |
| | |
| | |
| | |
|
Real estate loans: | |
| | |
| | |
| | |
| | |
|
Construction | 1,150 |
| | 2,250 |
| | 166 |
| | 1,685 |
| | — |
|
Secured by farmland | — |
| | — |
| | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 7,544 |
| | 8,203 |
| | 2,724 |
| | 7,842 |
| | 65 |
|
Other real estate loans | 7,505 |
| | 7,605 |
| | 1,045 |
| | 7,691 |
| | 73 |
|
Commercial loans | 417 |
| | 464 |
| | 338 |
| | 446 |
| | 14 |
|
Consumer loans | 30 |
| | 30 |
| | 30 |
| | 30 |
| | — |
|
Total with a related allowance | 16,646 |
| | 18,552 |
| | 4,303 |
| | 17,694 |
| | 152 |
|
Total | $ | 26,795 |
| | $ | 29,714 |
| | $ | 4,303 |
| | $ | 29,014 |
| | $ | 293 |
|
The “Recorded Investment” amounts in the tables above represent the outstanding principal balance on each loan represented in the tables plus any accrued interest receivable on such loans. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the tables plus any amounts that have been charged off on each loan.
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans table above are troubled debt restructurings (“TDRs”) that were classified as impaired. The total balance of TDRs at September 30, 2013 was $15.8 million of which $11.0 million were included in the Company’s non-accrual loan totals at that date and $4.8 million represented loans performing as agreed according to the restructured terms. The total amount of TDRs at September 30, 2013 represents an increase of $3.8 million or 31.7% from the amount at December 31, 2012 of $12.0 million. The amount of the valuation allowance related to total TDRs was $2.6 million and $2.0 million as of September 30, 2013 and December 31, 2012 respectively.
The $11.0 million in nonaccrual TDRs as of September 30, 2013 is comprised of $651,000 in real estate construction loans, $5.4 million in 1-4 family real estate loans, $4.9 million in other real estate loans, and $80,000 in commercial loans. The $4.8 million in TDRs which were performing as agreed under the restructured terms as of September 30, 2013 is comprised of $1.1 million in 1-4 family real estate loans, $3.1 million in other real estate loans and $642,000 in commercial loans. The Company considers all loans classified as TDRs to be impaired.
The following tables present by class of loan, information related to loans modified in a TDR during the three and nine months ended September 30, 2013:
|
| | | | | | | | | | |
| Loans modified as TDR's |
| For the three months ended |
| September 30, 2013 |
Class of Loan | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (In thousands) |
Real estate loans: | | | | | |
Construction | 1 |
| | $ | 45 |
| | $ | 41 |
|
Secured by farmland | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 6 |
| | 2,300 |
| | 1,986 |
|
Other real estate loans | 3 |
| | 701 |
| | 676 |
|
Total real estate loans | 10 |
| | 3,046 |
| | 2,703 |
|
Commercial loans | 1 |
| | 50 |
| | 49 |
|
Consumer loans | — |
| | — |
| | — |
|
Total | 11 |
| | $ | 3,096 |
| | $ | 2,752 |
|
| | | | | |
| | | | | |
| Loans modified as TDR's |
| For the nine months ended |
| September 30, 2013 |
Class of Loan | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
| (In thousands) |
Real estate loans: | |
| | |
| | |
|
Construction | 2 |
| | $ | 557 |
| | $ | 514 |
|
Secured by farmland | — |
| | — |
| | — |
|
Secured by 1-4 family residential | 11 |
| | 3,549 |
| | 3,227 |
|
Other real estate loans | 5 |
| | 869 |
| | 824 |
|
Total real estate loans | 18 |
| | 4,975 |
| | 4,565 |
|
Commercial loans | 2 |
| | 517 |
| | 515 |
|
Consumer loans | — |
| | — |
| | — |
|
Total | 20 |
| | $ | 5,492 |
| | $ | 5,080 |
|
During the three months ended September 30, 2013, the Company modified eleven loans that were considered to be TDRs and are summarized in the above table. The interest rates were reduced on ten of the loans and maturity dates were extended on nine of the loans.
During the nine months ended September 30, 2013, the Company modified twenty loans that were considered to be TDRs and are summarized in the above table. The interest rates were reduced on fifteen of the loans and maturity dates were extended on fifteen of the loans.
During the nine months ended September 30, 2013, the Company identified ten loans with an aggregate recorded investment of $3.8 million as TDRs for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying these loans as TDRs, the Company evaluated them for impairment and determined, based on a current evaluation, that these loans required an allowance for loan losses balance of $1.1 million at September 30, 2013.
One loan modified as a TDR in the past twelve months subsequently defaulted (i.e., 90 days or more past due following a restructuring) during the nine months ended September 30, 2013. The recorded investment of this loan was $712,000 as is classified as a 1-4 family residential loan.
Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, the specific reserve associated with the loan may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan.
| |
Note 5. | Allowance for Loan Losses |
The Company recorded a provision for loan losses of $3,000 for the three months ended September 30, 2013, compared to a provision for loan losses of $635,000 for the three months ended September 30, 2012. The Company recorded a recovery of loan losses of $1,000 for the nine months ended September 30, 2013, compared to a provision for loan losses of $2.2 million for the nine months ended September 30, 2012. Non-accruals as a percentage of total loans have decreased from 3.05% as of December 31, 2012 to 2.87% in the quarter ended September 30, 2013. The reserve for loan losses ratio decreased to 1.87% of portfolio loans at September 30, 2013 from 2.02% at December 31, 2012.
The following tables present a rollforward of the changes in the allowance for loan losses balance by class of loan, the balances in the allowance for loan losses and the recorded investment in loans by class of loan and, for the ending loan balances, based on impairment evaluation method as of September 30, 2013 and December 31, 2012.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2013 |
| | | | | (In Thousands) | | | | |
| Real Estate Construction | | Real Estate Secured by Farmland | | Real Estate Secured by 1-4 Family Residential | | Other Real Estate Loans | | Commercial | | Consumer | | Total |
Allowance for loan losses: | | | | | | | | | | | | | |
Balances as of December 31, 2012 | $ | 1,258 |
| | $ | 135 |
| | $ | 6,276 |
| | $ | 4,348 |
| | $ | 2,098 |
| | $ | 196 |
| | $ | 14,311 |
|
Charge-offs | (194 | ) | | — |
| | (783 | ) | | (97 | ) | | (38 | ) | | (28 | ) | | (1,140 | ) |
Recoveries | 47 |
| | — |
| | 109 |
| | 30 |
| | 7 |
| | 19 |
| | 212 |
|
Provision (Recovery) | 257 |
| | (26 | ) | | 459 |
| | (434 | ) | | (277 | ) | | 20 |
| | (1 | ) |
Balances as of September 30 2013 | $ | 1,368 |
| | $ | 109 |
| | $ | 6,061 |
| | $ | 3,847 |
| | $ | 1,790 |
| | $ | 207 |
| | $ | 13,382 |
|
Ending allowance balance: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending allowance balance attributable to loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Individually evaluated for impairment | $ | 508 |
| | $ | — |
| | $ | 2,904 |
| | $ | 830 |
| | $ | 285 |
| | $ | 30 |
| | $ | 4,557 |
|
Collectively evaluated for impairment | 860 |
| | 109 |
| | 3,157 |
| | 3,017 |
| | 1,505 |
| | 177 |
| | 8,825 |
|
Total ending allowance balances | $ | 1,368 |
| | $ | 109 |
| | $ | 6,061 |
| | $ | 3,847 |
| | $ | 1,790 |
| | $ | 207 |
| | $ | 13,382 |
|
Ending loan recorded investment balances: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Individually evaluated for impairment | $ | 2,897 |
| | $ | — |
| | $ | 10,840 |
| | $ | 9,342 |
| | $ | 2,505 |
| | $ | 30 |
| | $ | 25,614 |
|
Collectively evaluated for impairment | 34,258 |
| | 11,504 |
| | 259,146 |
| | 251,753 |
| | 120,780 |
| | 13,051 |
| | 690,492 |
|
Total ending loan balances | $ | 37,155 |
| | $ | 11,504 |
| | $ | 269,986 |
| | $ | 261,095 |
| | $ | 123,285 |
| | $ | 13,081 |
| | $ | 716,106 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| | | | | (In Thousands) | | | | |
| Real Estate Construction | | Real Estate Secured by Farmland | | Real Estate Secured by 1-4 Family Residential | | Other Real Estate Loans | | Commercial | | Consumer | | Total |
Allowance for loan losses: | | | | | | | | | | | | | |
Balances at December 31, 2011 | $ | 897 |
| | $ | 110 |
| | $ | 7,465 |
| | $ | 4,385 |
| | $ | 1,621 |
| | $ | 145 |
| | $ | 14,623 |
|
Charge-offs | (2,152 | ) | | — |
| | (893 | ) | | (760 | ) | | (394 | ) | | (72 | ) | | (4,271 | ) |
Recoveries | 2 |
| | — |
| | 388 |
| | 86 |
| | 12 |
| | 33 |
| | 521 |
|
Provision | 2,511 |
| | 25 |
| | (684 | ) | | 637 |
| | 859 |
| | 90 |
| | 3,438 |
|
Balances at December 31, 2012 | $ | 1,258 |
| | $ | 135 |
| | $ | 6,276 |
| | $ | 4,348 |
| | $ | 2,098 |
| | $ | 196 |
| | $ | 14,311 |
|
Ending allowance balance: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Ending allowance balance attributable to loans: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Individually evaluated for impairment | $ | 166 |
| | $ | — |
| | $ | 2,724 |
| | $ | 1,045 |
| | $ | 338 |
| | $ | 30 |
| | $ | 4,303 |
|
Collectively evaluated for impairment | 1,092 |
| | 135 |
| | 3,552 |
| | 3,303 |
| | 1,760 |
| | 166 |
| | 10,008 |
|
Total ending allowance balances | $ | 1,258 |
| | $ | 135 |
| | $ | 6,276 |
| | $ | 4,348 |
| | $ | 2,098 |
| | $ | 196 |
| | $ | 14,311 |
|
Ending loan recorded investment balances: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Individually evaluated for impairment | $ | 2,969 |
| | $ | — |
| | $ | 10,792 |
| | $ | 10,640 |
| | $ | 2,364 |
| | $ | 30 |
| | $ | 26,795 |
|
Collectively evaluated for impairment | 47,249 |
| | 11,876 |
| | 249,828 |
| | 244,290 |
| | 116,209 |
| | 13,230 |
| | 682,682 |
|
Total ending loan balances | $ | 50,218 |
| | $ | 11,876 |
| | $ | 260,620 |
| | $ | 254,930 |
| | $ | 118,573 |
| | $ | 13,260 |
| | $ | 709,477 |
|
| |
Note 6. | Earnings Per Share |
The following table shows the weighted average number of common shares used in computing earnings per share and the effect on the weighted average number of shares of potential dilutive common stock. Potential dilutive common stock has no effect on income available to common shareholders.
|
| | | | | | | | | | | | | |
| Three months ended |
| September 30, 2013 | | September 30, 2012 |
| Weighted Average Shares | | Per share Amount | | Weighted Average Shares | | Per share Amount |
Basic earnings per share | 7,080,244 |
| | $ | 0.23 |
| | 7,036,536 |
| | $ | 0.24 |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
|
stock options and grants | 37,964 |
| | — |
| | 15,324 |
| | — |
|
Diluted earnings per share | 7,118,208 |
| | $ | 0.23 |
| | 7,051,860 |
| | $ | 0.24 |
|
| | | | | | | |
| Nine months ended |
| September 30, 2013 | | September 30, 2012 |
| Weighted Average Shares | | Per share Amount | | Weighted Average Shares | | Per share Amount |
Basic earnings per share | 7,072,372 |
| | $ | 0.71 |
| | 7,026,663 |
| | $ | 0.72 |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
|
stock options and grants | 32,777 |
| | — |
| | 9,987 |
| | $ | — |
|
Diluted earnings per share | 7,105,149 |
| | $ | 0.71 |
| | 7,036,650 |
| | $ | 0.72 |
|
At September 30, 2013 and 2012, stock options, restricted grants and warrants representing approximately 6,000 and 33,000 shares, respectively, were not included in the calculation of earnings per share because they would have been anti-dilutive.
The Company operates in a decentralized fashion in three principal business activities: retail banking services; wealth management services; and mortgage banking services. Revenue from retail banking activities consists primarily of interest earned on loans and investment securities and service charges on deposit accounts.
Revenue from the wealth management activities is comprised of fees based upon the market value of the accounts under administration as well as commissions on investment transactions. The wealth management services are conducted by Middleburg Investment Group.
Revenue from the mortgage banking activities is comprised of interest earned on loans and fees received as a result of the mortgage origination process. The Company recognizes gains on the sale of loans as part of other income. The mortgage banking services are conducted by Southern Trust Mortgage, LLC.
Middleburg Bank and the Company have assets in custody with Middleburg Trust Company and accordingly pay Middleburg Trust Company a monthly fee. Middleburg Bank also pays interest to Middleburg Trust Company on deposit accounts with Middleburg Bank. As of September 30, 2013, Southern Trust Mortgage had no balances in interest bearing accounts with Middleburg Bank. Southern Trust Mortgage has an outstanding line of credit of $5.0 million and a participation agreement of $75.0 million for which it pays interest to Middleburg Bank on any outstanding balance. Middleburg Bank provides office space and data processing and accounting services to Southern Trust Mortgage for which it receives rental and fee income. Transactions related to these relationships are eliminated to reach consolidated totals.
The following table presents segment information for the three months ended September 30, 2013 and 2012, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| For the three months ended |
| September 30, 2013 |
| Retail Banking | | Wealth Management | | Mortgage Banking | | Intercompany Eliminations | | Consolidated |
(In Thousands) | | | | | | | | | |
Revenues: | | | | | | | | | |
Interest income | $ | 10,750 |
| | $ | 4 |
| | $ | 520 |
| | $ | (320 | ) | | $ | 10,954 |
|
Trust and investment fee income | — |
| | 1,000 |
| | — |
| | (37 | ) | | 963 |
|
Other income | 899 |
| | — |
| | 4,358 |
| | (92 | ) | | 5,165 |
|
Total operating income | 11,649 |
| | 1,004 |
| | 4,878 |
| | (449 | ) | | 17,082 |
|
Expenses: | |
| | |
| | |
| | |
| | |
|
Interest expense | 1,574 |
| | — |
| | 380 |
| | (320 | ) | | 1,634 |
|
Salaries and employee benefits | 4,183 |
| | 393 |
| | 3,174 |
| | — |
| | 7,750 |
|
Provision for loan losses | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Other | 4,240 |
| | 223 |
| | 1,221 |
| | (129 | ) | | 5,555 |
|
Total operating expenses | 9,997 |
| | 616 |
| | 4,778 |
| | (449 | ) | | 14,942 |
|
Income before income taxes and non-controlling interest | 1,652 |
| | 388 |
| | 100 |
| | — |
| | 2,140 |
|
Income tax expense | 440 |
| | 51 |
| | — |
| | — |
| | 491 |
|
Net Income | 1,212 |
| | 337 |
| | 100 |
| | — |
| | 1,649 |
|
Non-controlling interest in income of consolidated subsidiary | — |
| | — |
| | (38 | ) | | — |
| | (38 | ) |
Net income attributable to Middleburg Financial Corporation | $ | 1,212 |
| | $ | 337 |
| | $ | 62 |
| | $ | — |
| | $ | 1,611 |
|
Total assets | $ | 1,202,151 |
| | $ | 12,192 |
| | $ | 52,281 |
| | $ | (51,297 | ) | | $ | 1,215,327 |
|
Capital expenditures | $ | 693 |
| | $ | 5 |
| | $ | 115 |
| | $ | — |
| | $ | 813 |
|
Goodwill and other intangibles | $ | — |
| | $ | 4,022 |
| | $ | 1,867 |
| | $ | — |
| | $ | 5,889 |
|
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| For the three months ended |
| September 30, 2012 |
| Retail Banking | | Wealth Management | | Mortgage Banking | | Intercompany Eliminations | | Consolidated |
(In Thousands) | | | | | | | | | |
Revenues: | | | | | | | | | |
Interest income | $ | 11,262 |
| | $ | 2 |
| | $ | 630 |
| | $ | (487 | ) | | $ | 11,407 |
|
Trust and investment fee income | — |
| | 963 |
| | — |
| | (35 | ) | | 928 |
|
Other income | 1,164 |
| | — |
| | 6,306 |
| | (80 | ) | | 7,390 |
|
Total operating income | 12,426 |
| | 965 |
| | 6,936 |
| | (602 | ) | | 19,725 |
|
Expenses: | |
| | |
| | |
| | |
| | |
|
Interest expense | 2,115 |
| | — |
| | 562 |
| | (487 | ) | | 2,190 |
|
Salaries and employee benefits | 3,912 |
| | 358 |
| | 3,006 |
| | — |
| | 7,276 |
|
Provision for (recovery of) loan losses | 642 |
| | — |
| | (7 | ) | | — |
| | 635 |
|
Other | 5,221 |
| | 232 |
| | 1,222 |
| | (115 | ) | | 6,560 |
|
Total operating expenses | 11,890 |
| | 590 |
| | 4,783 |
| | (602 | ) | | 16,661 |
|
Income before income taxes and non-controlling interest | 536 |
| | 375 |
| | 2,153 |
| | — |
| | 3,064 |
|
Income tax expense | 514 |
| | 51 |
| | — |
| | — |
| | 565 |
|
Net Income | 22 |
| | 324 |
| | 2,153 |
| | — |
| | 2,499 |
|
Non-controlling interest in income of consolidated subsidiary | — |
| | — |
| | (785 | ) | | — |
| | (785 | ) |
Net income attributable to Middleburg Financial Corporation | $ | 22 |
| | $ | 324 |
| | $ | 1,368 |
| | $ | — |
| | $ | 1,714 |
|
Total assets | $ | 1,209,455 |
| | $ | 12,789 |
| | $ | 104,919 |
| | $ | (91,202 | ) | | $ | 1,235,961 |
|
Capital expenditures | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
Goodwill and other intangibles | $ | — |
| | $ | 4,193 |
| | $ | 1,867 |
| | $ | — |
| | $ | 6,060 |
|
The following table presents segment information for the nine months ended September 30, 2013 and 2012, respectively. |
| | | | | | | | | | | | | | | | | | | |
| For the nine months ended |
| September 30, 2013 |
| Retail Banking | | Wealth Management | | Mortgage Banking | | Intercompany Eliminations | | Consolidated |
(In Thousands) | | | | | | | | | |
Revenues: | | | | | | | | | |
Interest income | $ | 32,742 |
| | $ | 11 |
| | $ | 1,398 |
| | $ | (993 | ) | | $ | 33,158 |
|
Trust and investment fee income | — |
| | 3,052 |
| | — |
| | (115 | ) | | 2,937 |
|
Other income | 3,363 |
| | — |
| | 13,161 |
| | (325 | ) | | 16,199 |
|
Total operating income | 36,105 |
| | 3,063 |
| | 14,559 |
| | (1,433 | ) | | 52,294 |
|
Expenses: | |
| | |
| | |
| | |
| | |
|
Interest expense | 4,956 |
| | — |
| | 1,099 |
| | (993 | ) | | 5,062 |
|
Salaries and employee benefits | 12,485 |
| | 1,623 |
| | 9,134 |
| | — |
| | 23,242 |
|
Provision for (recovery of) loan losses | (9 | ) | | — |
| | 8 |
| | — |
| | (1 | ) |
Other | 12,930 |
| | 910 |
| | 3,699 |
| | (440 | ) | | 17,099 |
|
Total operating expenses | 30,362 |
| | 2,533 |
| | 13,940 |
| | (1,433 | ) | | 45,402 |
|
Income before income taxes and non-controlling interest | 5,743 |
| | 530 |
| | 619 |
| | — |
| | 6,892 |
|
Income tax expense | 1,403 |
| | 225 |
| | — |
| | — |
| | 1,628 |
|
Net Income | 4,340 |
| | 305 |
| | 619 |
| | — |
| | 5,264 |
|
Non-controlling interest in income of consolidated subsidiary | — |
| | — |
| | (233 | ) | | — |
| | (233 | ) |
Net income attributable to Middleburg Financial Corporation | $ | 4,340 |
| | $ | 305 |
| | $ | 386 |
| | $ | — |
| | $ | 5,031 |
|
Total assets | $ | 1,202,151 |
| | $ | 12,192 |
| | $ | 52,281 |
| | $ | (51,297 | ) | | $ | 1,215,327 |
|
Capital expenditures | $ | 1,144 |
| | $ | 5 |
| | $ | 124 |
| | $ | — |
| | $ | 1,273 |
|
Goodwill and other intangibles | $ | — |
| | $ | 4,022 |
| | $ | 1,867 |
| | $ | — |
| | $ | 5,889 |
|
| | | | | | | | | |
| | | | | | | | | |
| For the nine months ended |
| September 30, 2012 |
| Retail Banking | | Wealth Management | | Mortgage Banking | | Intercompany Eliminations | | Consolidated |
(In Thousands) | | | | | | | | | |
Revenues: | | | | | | | | | |
Interest income | $ | 34,837 |
| | $ | 7 |
| | $ | 2,067 |
| | $ | (1,348 | ) | | $ | 35,563 |
|
Trust and investment fee income | — |
| | 2,932 |
| | — |
| | (104 | ) | | 2,828 |
|
Other income | 3,351 |
| | — |
| | 15,719 |
| | (425 | ) | | 18,645 |
|
Total operating income | 38,188 |
| | 2,939 |
| | 17,786 |
| | (1,877 | ) | | 57,036 |
|
Expenses: | |
| | |
| | |
| | |
| | |
|
Interest expense | 6,606 |
| | — |
| | 1,659 |
| | (1,348 | ) | | 6,917 |
|
Salaries and employee benefits | 11,585 |
| | 1,438 |
| | 9,116 |
| | — |
| | 22,139 |
|
Provision for loan losses | 2,127 |
| | — |
| | 29 |
| | — |
| | 2,156 |
|
Other | 13,267 |
| | 874 |
| | 4,712 |
| | (529 | ) | | 18,324 |
|
Total operating expenses | 33,585 |
| | 2,312 |
| | 15,516 |
| | (1,877 | ) | | 49,536 |
|
Income before income taxes and non-controlling interest | 4,603 |
| | 627 |
| | 2,270 |
| | — |
| | 7,500 |
|
Income tax expense | 1,319 |
| | 259 |
| | — |
| | — |
| | 1,578 |
|
Net Income | 3,284 |
| | 368 |
| | 2,270 |
| | — |
| | 5,922 |
|
Non-controlling interest in income of consolidated subsidiary | — |
| | — |
| | (856 | ) | | — |
| | (856 | ) |
Net income attributable to Middleburg Financial Corporation | $ | 3,284 |
| | $ | 368 |
| | $ | 1,414 |
| | $ | — |
| | $ | 5,066 |
|
Total assets | $ | 1,209,455 |
| | $ | 12,789 |
| | $ | 104,919 |
| | $ | (91,202 | ) | | $ | 1,235,961 |
|
Capital expenditures | $ | 541 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 541 |
|
Goodwill and other intangibles | $ | — |
| | $ | 4,193 |
| | $ | 1,867 |
| | $ | — |
| | $ | 6,060 |
|
Note. 8 Capital Purchase Program
During 2009, the Company participated in the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 and issued 22,000 shares of preferred stock to the Treasury as well as a warrant (“the Warrant”) to purchase 208,202 shares of the Company’s common stock at an initial exercise price of $15.85 per share. As a result of the completion of the Company’s public stock offering in August 2009, the number of shares of common stock underlying the Warrant was reduced by one-half to 104,101. On December 23, 2009, the Company redeemed all of the shares of preferred stock issued to the Treasury. During 2011, the Warrant was sold by the U.S. Treasury at public auction and has not been exercised as of September 30, 2013.
Note 9. Fair Value Measurements
The Company adopted ASC 820, Fair Value Measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:
| |
Level I: | Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
| |
Level II: | Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed. |
| |
Level III: | Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. |
Measured on recurring basis
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:
Securities available for sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level I). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level II). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified as Level III of the valuation hierarchy.
Loans Held for Sale
Loans held for sale are carried at market value. These loans currently consist of 1-4 family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data (Level II). Gains and losses on the sale of loans are recorded within income from mortgage banking activities on the consolidated statements of income.
Derivatives
Derivatives are recorded at fair value on a recurring basis. Third party vendors compile prices from various sources and may determine the fair value of identical or similar instruments by using pricing models that consider observable market data (Level II).
Mortgage Servicing Rights
The Company obtains the fair value of mortgage servicing rights from an independent valuation service. The model used by the independent service to value mortgage servicing rights incorporates inputs and assumptions such as loan characteristics, contractually specified servicing fees, prepayment speeds, delinquency rates, late charges, escrow income, other ancillary revenue, costs to service and other economic factors. Fair value estimates from the model are adjusted for recent market activity, actual experience and, when available, other observable market data (Level II).
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012.
|
| | | | | | | | | | | | | | | |
| September 30, 2013 |
| (In thousands) |
| Total | | Level I | | Level II | | Level III |
Assets: | | | | | | | |
U.S. government agencies | $ | 21,465 |
| | $ | — |
| | $ | 21,465 |
| | $ | — |
|
Obligations of states and political subdivisions | 76,104 |
| | — |
| | 76,104 |
| | — |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
Agency | 161,055 |
| | — |
| | 161,055 |
| | — |
|
Non-agency | 18,123 |
| | — |
| | 18,123 |
| | — |
|
Other asset-backed securities | 36,237 |
| | — |
| | 36,237 |
| | — |
|
Corporate preferred stock | 73 |
| | — |
| | 73 |
| | — |
|
Corporate securities | 15,321 |
| | — |
| | 14,836 |
| | 485 |
|
Mortgage interest rate locks | 651 |
| | — |
| | 651 |
| | — |
|
Loans held for sale | 41,855 |
| | — |
| | 41,855 |
| | — |
|
Interest rate swaps | 167 |
| | — |
| | 167 |
| | — |
|
Mortgage servicing rights | 155 |
| | — |
| | 155 |
| | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Interest rate swaps | $ | 326 |
| | $ | — |
| | $ | 326 |
| | $ | — |
|
Mortgage banking hedge instruments | 613 |
| | — |
| | 613 |
| | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2012 |
| (In thousands) |
| Total | | Level I | | Level II | | Level III |
Assets: | | | | | | | |
U.S. government agencies | $ | 15,822 |
| | $ | — |
| | $ | 15,822 |
| | $ | — |
|
Obligations of states and political subdivisions | 78,300 |
| | — |
| | 78,300 |
| | — |
|
Mortgage-backed securities: | |
| | |
| | |
| | |
|
Agency | 166,943 |
| | — |
| | 166,943 |
| | — |
|
Non-agency | 15,579 |
| | — |
| | 15,579 |
| | — |
|
Other asset-backed securities | 34,642 |
| | — |
| | 34,642 |
| | — |
|
Corporate preferred stock | 62 |
| | — |
| | 62 |
| | — |
|
Corporate securities | 8,109 |
| | — |
| | 8,109 |
| | — |
|
Loans held for sale | 82,114 |
| | — |
| | 82,114 |
| | — |
|
Mortgage interest rate locks | 35 |
| | — |
| | 35 |
| | — |
|
Interest rate swaps | 80 |
| | — |
| | 80 |
| | — |
|
Liabilities: | | | | | | | |
Interest rate swap | $ | 541 |
| | $ | — |
| | $ | 541 |
| | $ | — |
|
Mortgage banking hedge instruments | 39 |
| | — |
| | 39 |
| | — |
|
The following table presents quantitative information as of September 30, 2013 related to Level III fair value measurements for financial assets measured at fair value on a recurring basis:
|
| | | | | | | | |
| | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs |
| | | | | | |
Corporate Securities | | $ | 485 |
| | Third party trading desk | | Prices heavily influenced by unobservable market inputs. |
Measured on nonrecurring basis
Certain financial assets and certain financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or impairment of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:
Impaired Loans
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan, or the fair value of the underlying collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level II). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level III. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level III). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments as a result of the evaluation process are recorded in the period incurred as provision for loan losses on the consolidated statements of income.
When collateral-dependent loans are performing in accordance with the original terms of their contract, the Company continues to use the appraisal that was done at origination as the basis for the collateral value. When collateral-dependent loans are considered non-performing, they are assessed to determine the next appropriate course of action: either foreclosure or modification with forbearance agreement. The loans would then be re-appraised prior to foreclosure or before a forbearance agreement is executed. Thereafter, collateral for loans under a forbearance agreement may be re-appraised as the circumstances warrant. This process does not vary by loan type.
The Company’s procedure to monitor the value of collateral for collateral-dependent impaired loans between the receipt of an original appraisal and an updated appraisal is to review tax assessment records when they change annually. At the time of any change in tax assessment, an appropriate adjustment is made to the appraised value. Information considered in a determination not to order an updated appraisal includes the availability and reliability of tax assessment records and any significant changes in capitalization rates for income properties since the original appraisal. Other facts and circumstances on a case by case basis may be considered relative to a decision to order or not to order an updated appraisal. If, in the judgment of management, a reliable collateral value estimate cannot be obtained by an alternative method, an updated appraisal would be obtained.
Circumstances that may warrant a re-appraisal for non-performing (impaired) loans might include foreclosure proceedings or a material adverse change in the borrower’s condition or that of the collateral underlying the loan. Examples include bankruptcy filing by the debtor or guarantors, loss of a major tenant in an income property, or a significant increase in capitalization rates for income properties. In some cases, management may decide that an updated appraisal for a non-performing loan is not necessary. In such cases, an estimate of the fair value of the collateral for the loans would be made by management by reference to current tax assessment records, the latest appraised value, and knowledge of collateral value fluctuations in a loan’s market area. If, in the judgment of management, a reliable collateral value estimate cannot be obtained by an alternative method, an updated appraisal would be obtained.
For the purpose of the evaluation of the adequacy of our allowance for loan losses, new appraisals are discounted approximately 10% for selling costs when determining the amount of the specific reserve. Thereafter, for collateral-dependent impaired loans, we consider each loan on a case-by-case basis to determine whether or not the recorded values are appropriate given current market conditions. When warranted, new appraisals are obtained. If an appraisal is less than 12 months old, the only adjustment made to appraised values is the 10% discount for selling costs. If an appraisal is older than 12 months, management will use judgment based on knowledge of current market values and specific facts surrounding any particular property to determine if an additional valuation adjustment may be necessary.
For real estate secured impaired loans, if the Company does not have an adequate appraisal a new one is ordered to determine fair value. An appraisal that would be considered adequate for real estate-secured loans is one that is less than 12 months or one that is more than 12 months old but alternative methods with which to monitor the collateral value exist, such as reference to frequently updated tax assessments. Appraisals that would be considered inadequate for real estate secured loans include appraisals older than 12 months and with a property located in a jurisdiction that does not reassess property values on a regular basis, or with a property to which substantial changes have been made since the last assessment. If the loan is secured by assets other than real estate and an appraisal is neither available nor feasible, the loan is treated as unsecured.
It is the Company’s policy to account for partially charged-off loans consistently both before and after updated appraisals are obtained. Partially charged-off loans are placed in non-accrual status and remain in that status until the borrower has made a minimum of six consecutive monthly payments on a timely basis and there is evidence that the borrower has the ability to repay the balance of the loan plus accrued interest in full. Partially charged-off loans are not automatically returned to accrual status when updated appraisals are obtained.
The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of September 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | (In thousands) |
Description | | Total | | Level I | | Level II | | Level III |
Assets: | | | | | | | | |
Impaired loans | | $ | 8,305 |
| | $ | — |
| | $ | 3,691 |
| | $ | 4,614 |
|
| | | | | | | | |
| | December 31, 2012 |
| | (In thousands) |
Description | | Total | | Level I | | Level II | | Level III |
Assets: | | |
| | |
| | |
| | |
|
Impaired loans | | $ | 12,343 |
| | $ | — |
| | $ | 11,165 |
| | $ | 1,178 |
|
Other Real Estate Owned
The value of other real estate owned (“OREO”) is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level II). For other real estate owned properties, the Company’s policy is to obtain “as-is” appraisals on an annual basis as opposed to “as-completed” appraisals. This approach provides current values without regard to completion of any construction or renovation that may be in process on OREO properties. Accordingly, the Company considers the valuations to be Level II valuations even though some properties may be in process of renovation or construction. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability or other factors, then the fair value is considered Level III. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Any subsequent fair value adjustments are recorded in the period incurred and included in other non-interest expense on the consolidated statements of income.
For the purpose of OREO valuations, appraisals are discounted approximately 10% for selling and holding costs and it is the policy of the Company to obtain annual appraisals for properties held in OREO.
The following table summarizes the Company’s non-financial assets that were measured at fair value on a nonrecurring basis during the period.
|
| | | | | | | | | | | | | | | | |
| | September 30, 2013 |
| | (In thousands) |
Description | | Total | | Level I | | Level II | | Level III |
Assets: | | | | | | | | |
Other real estate owned | | $ | 4,530 |
| | $ | — |
| | $ | 4,530 |
| | $ | — |
|
| | | | | | | | |
| | December 31, 2012 |
| | (In thousands) |
Description | | Total | | Level I | | Level II | | Level III |
Assets: | | |
| | |
| | |
| | |
|
Other real estate owned | | $ | 9,929 |
| | $ | — |
| | $ | 7,619 |
| | $ | 2,310 |
|
The following table presents quantitative information as of September 30, 2013 about Level III fair value measurements for financial assets measured at fair value on a non-recurring basis:
|
| | | | | | | | | | |
| | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
| | | | | | | | |
Impaired Loans | | $ | 4,614 |
| | Market comparables | | Discount applied to market comparables (1) | | 10% - 30% (21%) |
(1) A discount percentage is applied based on age of independent appraisals, current market conditions, and experience within the local markets.
The following table presents quantitative information as of December 31, 2012 about Level III fair value measurements for financial assets measured at fair value on a non-recurring basis:
|
| | | | | | | | | | |
| | Fair Value (in thousands) | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
| | | | | | | | |
Impaired Loans | | $ | 1,178 |
| | Discounted appraised value | | Discount for selling costs and age of appraisals. | | 10% - 30% (21%) |
Other real estate owned | | $ | 2,310 |
| | Discounted appraised value | | Discount for selling costs, construction status, and age of appraisals. | | 12% (12%) |
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. U.S. generally accepted accounting principles excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents
For those cash equivalents, the carrying amount is a reasonable estimate of fair value.
Loans, Net and Loans Held for Sale
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. (See "Impaired Loans" above for a discussion of valuation methodologies for loans considered to be impaired.)
Bank Owned Life Insurance
The carrying amount of bank owned life insurance is a reasonable estimate of fair value.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate fair values.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For all other deposits, the fair value is determined using the discounted cash flow method. The discount rate used is equal to the rate currently offered on similar products.
Securities Sold Under Agreements to Repurchase and Short-Term Borrowings
The carrying amounts approximate fair values.
FHLB Borrowings, Long-Term Borrowings and Subordinated Notes
For variable rate long-term debt, fair values are based on carrying values. For fixed rate debt, fair values are estimated based on observable market prices and discounted cash flow analysis using interest rates for borrowings of similar remaining maturities and characteristics. The fair values of the Company's Subordinated Debentures are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2013 and December 31, 2012, the fair values of loan commitments and standby letters of credit were deemed immaterial; therefore, they have not been included in the table below.
Fair Value of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company's financial instruments as of September 30, 2013 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2013 |
| | | | | Fair value measurements using: |
| Carrying Amount | | Total Fair Value | | Level I | | Level II | | Level III |
| (In thousands) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 62,645 |
| | $ | 62,645 |
| | $ | 62,645 |
| | $ | — |
| | $ | — |
|
Securities | 328,378 |
| | 328,378 |
| | — |
| | 327,893 |
| | 485 |
|
Loans held for sale | 41,855 |
| | 41,855 |
| | — |
| | 41,855 |
| | — |
|
Net portfolio loans | 702,724 |
| | 716,046 |
| | — |
| | 3,691 |
| | 712,355 |
|
Bank owned life insurance | 16,851 |
| | 16,851 |
| | — |
| | 16,851 |
| | — |
|
Accrued interest receivable | 3,924 |
| | 3,924 |
| | — |
| | 3,924 |
| | — |
|
Mortgage interest rate locks | 651 |
| | 651 |
| | — |
| | 651 |
| | — |
|
Interest rate swaps | 167 |
| | 167 |
| | — |
| | 167 |
| | — |
|
Mortgage servicing rights | 155 |
| | 155 |
| | — |
| | 155 |
| | — |
|
| | | | | | | | | |
Financial liabilities: | |
| | |
| | | | | | |
Deposits | $ | 958,566 |
| | $ | 961,035 |
| | $ | — |
| | $ | 961,035 |
| | $ | — |
|
Securities sold under agreements to repurchase | 35,005 |
| | 35,005 |
| | — |
| | 35,005 |
| | — |
|
Short-term borrowings | 5,451 |
| | 5,451 |
| | — |
| | 5,451 |
| | — |
|
FHLB borrowings | 85,000 |
| | 85,862 |
| | — |
| | 85,862 |
| | — |
|
Subordinated notes | 5,155 |
| | 5,207 |
| | — |
| | 5,207 |
| | — |
|
Accrued interest payable | 527 |
| | 527 |
| | — |
| | 527 |
| | — |
|
Interest rate swaps | 326 |
| | 326 |
| | — |
| | 312 |
| | — |
|
Mortgage banking hedge instruments | 613 |
| | 613 |
| | — |
| | 613 |
| | — |
|
The estimated fair values, and related carrying amounts, of the Company's financial instruments at December 31, 2012 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2012 |
| | | | | Fair value measurements using: |
| Carrying Amount | | Total Fair Value | | Level I | | Level II | | Level III |
| (In thousands) |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 54,415 |
| | $ | 54,415 |
| | $ | 54,415 |
| | $ | — |
| | $ | — |
|
Securities | 319,457 |
| | 319,457 |
| | — |
| | 319,457 |
| | — |
|
Loans held for sale | 82,114 |
| | 82,114 |
| | — |
| | 82,114 |
| | — |
|
Net portfolio loans | 695,166 |
| | 716,358 |
| | — |
| | 1,178 |
| | 715,180 |
|
Bank owned life insurance | 16,484 |
| | 16,484 |
| | — |
| | 16,484 |
| | — |
|
Accrued interest receivable | 3,974 |
| | 3,974 |
| | — |
| | 3,974 |
| | — |
|
Mortgage interest rate locks | 35 |
| | 35 |
| | — |
| | 35 |
| | — |
|
Interest rate swaps | 80 |
| | 80 |
| | — |
| | 80 |
| | — |
|
| | | | | | | | | |
Financial liabilities: | |
| | |
| | | | | | |
Deposits | $ | 981,900 |
| | $ | 984,682 |
| | $ | — |
| | $ | 984,682 |
| | $ | — |
|
Securities sold under agreements to repurchase | 33,975 |
| | 33,975 |
| | — |
| | 33,975 |
| | — |
|
Short-term borrowings | 11,873 |
| | 11,873 |
| | — |
| | 11,873 |
| | — |
|
FHLB borrowings | 72,912 |
| | 78,912 |
| | — |
| | 78,912 |
| | — |
|
Subordinated notes | 5,155 |
| | 5,221 |
| | — |
| | 5,221 |
| | — |
|
Accrued interest payable | 654 |
| | 654 |
| | — |
| | 654 |
| | — |
|
Interest rate swaps | 541 |
| | 541 |
| | — |
| | 541 |
| | — |
|
Mortgage banking hedge instruments | 39 |
| | 39 |
| | — |
| | 39 |
| | — |
|
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.
Note 10. Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset's fair value when testing an indefinite-lived intangible asset for impairment. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Companies should apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the consolidated financial statements.
In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this ASU permit the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to interest rates on direct Treasury obligations of the U.S. government and the London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
Note 11. Accumulated Other Comprehensive Income
The following table presents information on changes in each component of accumulated other comprehensive income and the ending balances for the periods indicated:
|
| | | | | | | | | | | |
| Accumulated Other Comprehensive Income (1) |
| (in thousands) |
| Net Unrealized Gains (Losses) on Securities | | Derivatives | | Total |
Balance December 31, 2011 | $ | 4,133 |
| | $ | (207 | ) | | $ | 3,926 |
|
Other comprehensive income (loss) before reclassifications | 2,758 |
| | (122 | ) | | 2,636 |
|
Amounts reclassified from accumulated other comprehensive income | (298 | ) | | — |
| | (298 | ) |
Change during period | 2,460 |
| | (122 | ) | | 2,338 |
|
Balance September 30, 2012 | $ | 6,593 |
| | $ | (329 | ) | | $ | 6,264 |
|
| | | | | |
Balance December 31, 2012 | $ | 6,771 |
| | $ | (304 | ) | | $ | 6,467 |
|
Other comprehensive income (loss) before reclassifications | (5,572 | ) | | 200 |
| | (5,372 | ) |
Amounts reclassified from accumulated other comprehensive income | (262 | ) | | — |
| | (262 | ) |
Change during period | (5,834 | ) | | 200 |
| | (5,634 | ) |
Balance September 30, 2013 | $ | 937 |
| | $ | (104 | ) | | $ | 833 |
|
(1) All amounts shown are net of applicable income taxes using an income tax rate of 34%.
The following tables present information related to reclassifications from accumulated other comprehensive income during the periods indicated.
|
| | | | | | | | | | |
| | Amount Reclassified from Accumulated Other Comprehensive Income | | |
| | (in thousands) | | |
Details about Accumulated Other Comprehensive Income Components | | For the three months ended September 30, | | Affected Line Item in the Consolidated Statements of Income |
| | 2013 | | 2012 | | |
Securities available for sale (1): | | | | | | |
Net securities gains reclassified into earnings | | $ | (23 | ) | | $ | (164 | ) | | Gain on securities available for sale |
Related income tax expense | | 8 |
| | 56 |
| | Income tax expense |
Net effect on accumulated other comprehensive income for the period | | (15 | ) | | (108 | ) | | Net of tax |
| | | | | | |
Total reclassifications for the period | | $ | (15 | ) | | $ | (108 | ) | | Net of tax |
| | | | | | |
| | Amount Reclassified from Accumulated Other Comprehensive Income | | |
| | (in thousands) | | |
Details about Accumulated Other Comprehensive Income Components | | For the nine months ended September 30, | | Affected Line Item in the Consolidated Statements of Income |
| | 2013 | | 2012 | | |
Securities available for sale (1): | | | | | | |
Net securities gains reclassified into earnings | | $ | (397 | ) | | $ | (452 | ) | | Gain on securities available for sale |
Related income tax expense | | 135 |
| | 154 |
| | Income tax expense |
Net effect on accumulated other comprehensive income for the period | | (262 | ) | | (298 | ) | | Net of tax |
| | | | | | |
Total reclassifications for the period | | $ | (262 | ) | | $ | (298 | ) | | Net of tax |
(1) For more information related to unrealized gains on securities available for sale, see Note 3, "Securities."
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition at September 30, 2013 and results of operations of the Company for the three and nine months ended September 30, 2013 should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report and in the 2012 Form 10-K. It should also be read in conjunction with the “Caution About Forward Looking Statements” section at the end of this discussion.
Overview
The Company is headquartered in Middleburg, Virginia and conducts its primary operations through two wholly owned subsidiaries, Middleburg Bank and Middleburg Investment Group, Inc., and a majority owned subsidiary, Southern Trust Mortgage, LLC. Middleburg Bank is a community bank serving the Virginia counties of Loudoun, Fairfax, Fauquier and western Prince William as well as the Town of Williamsburg, Virginia and the City of Richmond, Virginia. The Bank operates twelve financial service centers and one limited service facility. Middleburg Investment Group is a non-bank holding company that was formed in the fourth quarter of 2005. It has one wholly-owned subsidiary, Middleburg Trust Company which is headquartered in Richmond, Virginia, and maintains offices in Williamsburg, Virginia and in several of Middleburg Bank’s facilities. Southern Trust Mortgage is a regional mortgage company headquartered in Virginia Beach, Virginia and maintains offices in Virginia, Maryland, Georgia, North Carolina and South Carolina.
The Company operates under a business model that makes all of its financial and wealth management services available to its clients at all of its financial service centers. Financial service centers are larger than most traditional retail banking branches in order to allow commercial, mortgage, retail and wealth management personnel and services to be readily available to serve clients. By working together in the financial service center and the market, the team at each financial service center becomes more effective in expanding relationships with current clients and new clients. The Company’s goal is to assist in the creation, preservation and ultimate transfer of the wealth of its clients.
The Company generates a significant amount of its income from the net interest income earned by Middleburg Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the amount of interest-earning assets outstanding during the period and the interest rates earned thereon. Middleburg Bank’s cost of money is a function of the average amount of deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on non-accrual loans and the amount of additions to the allowance for loan losses. Middleburg Bank also generates income from fees on deposits and loans.
Middleburg Investment Group’s subsidiary, Middleburg Trust Company, generates fee income by providing trust and investment management services to its clients. Investment management and trust fees are generally based upon the value of assets under administration and, therefore, can be significantly affected by fluctuation in the values of securities caused by changes in the capital markets.
Southern Trust Mortgage generates fees from the origination and sale of mortgage loans. Southern Trust Mortgage also maintains a real estate construction portfolio and receives interest and fee income from these loans, which, net of interest expense, is included in net interest income.
Net income attributable to Middleburg Financial Corporation for the three months ended September 30, 2013 decreased 6.0% to $1.6 million from $1.7 million over the same period in 2012. Earnings per fully diluted share for the three months ended September 30, 2013 was $0.23 per share compared to $0.24 per share for the same period in 2012.
Annualized return on total average assets for the three months ended September 30, 2013 was 0.52%, compared to 0.55% for the same period in 2012. Annualized return on total average equity of Middleburg Financial Corporation for the three months ended September 30, 2013 was 5.71%, compared to 6.11% for the same period in 2012.
As a result of improving trends in non-accrual loans and improved risk ratings for several loans during the quarter, the Company recorded a loan loss provision of $3,000 for the three months ended September 30, 2013, compared to $635,000 for the three months ended September 30, 2012. The reserve ratio decreased to 1.87% of portfolio loans at September 30, 2013 from 2.02% at December 31, 2012. As of the end of the quarter, the coverage ratio for non-performing assets (allowance for loan losses balance divided by non-performing assets) increased to 43.9% of nonperforming assets from 37.9% at December 31, 2012.
Net interest income before provision for loan losses for the three months ended September 30, 2013 was $9.3 million compared to $9.2 million for the three months ended September 30, 2012. Total non-interest income decreased to $6.1 million for the three
months ended September 30, 2013 compared to $8.3 million for the three months ended September 30, 2012. Total non-interest expense decreased approximately $531,000 to $13.3 million for the three months ended September 30, 2013 from $13.8 million for the same period in 2012.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains significant modifications to the current bank regulatory structure and requires various federal agencies to adopt a broad range of new rules and regulations. While not fully determinable at this time, the impact of the Dodd-Frank Act and the rules and regulations that will be promulgated thereunder could significantly affect our operations, increase our operating costs and divert management resources.
Under the changes to the regulatory capital framework that were approved on July 9, 2013 by the federal banking agencies (Basel III Final Rule), the Company's subordinated notes will continue to be included in Tier 1 Capital until they mature, pursuant to a "grandfathering" provision that exempts the Company's trust preferred securities from the more stringent regulatory capital treatment contained in the Basel III Final Rule for trust preferred securities. In addition to "grandfathering" certain previously outstanding trust preferred securities for bank holding companies with total assets less than $15 billion (as of December 31, 2009), the Basel III Final Rule introduces a new Common Equity Tier 1 Capital measure, increases the applicable minimum regulatory capital levels and certain prompt corrective action capital levels, establishes a capital conservation buffer and new risk weights for certain types of assets. The Basel III Final Rule also permits a one-time Accumulated Other Comprehensive Income (“AOCI”) opt out for banking organizations not subject to advanced approaches rule (those with greater than $250 billion in assets). Election must be made in the first call report filed by a banking organization after January 1, 2015, when it becomes subject to the final rule. The Basel III Final Rule is effective on January 1, 2015 for banking organizations not subject to the advanced approaches rules and has a transition period applicable to certain regulatory capital changes until January 1, 2019. The Company is not subject to the advanced approaches rules and plans on making the one-time AOCI opt-out election in the first quarter of 2015.
Critical Accounting Policies
General
The financial condition and results of operations presented in the Consolidated Financial Statements, the accompanying Notes to Consolidated Financial Statements and this section are, to a large degree, dependent upon the accounting policies of the Company. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.
Presented below is discussion of those accounting policies that management believes are the most important (“Critical Accounting Policies”) to the portrayal and understanding of the Company’s financial condition and results of operations. The Critical Accounting Policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
Allowance for Loan Losses
Middleburg Bank monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. Middleburg Bank maintains policies and procedures that address the systems of controls over the following areas: the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.
Middleburg Bank evaluates various loans individually for impairment as required by applicable accounting standards. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment with a group of loans that have similar characteristics.
For loans without individual measures of impairment, Middleburg Bank makes estimates of losses for groups of loans as required by applicable accounting standards. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The
resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of Middleburg Bank as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. Middleburg Bank recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.
Intangibles and Goodwill
The Company had approximately $5.9 million in intangible assets and goodwill at September 30, 2013, a decrease of $128,000 or 2.1% since December 31, 2012, which is attributable to regular amortization of intangible assets.
On April 1, 2002, the Company acquired Middleburg Investment Advisors for $6.0 million. Approximately $5.9 million of the purchase price was allocated to intangible assets and goodwill. In connection with this investment, a purchase price valuation was completed to determine the appropriate allocation to identified intangibles. The valuation concluded that approximately 42% of the purchase price was related to the acquisition of customer relationships with an amortizable life of 15 years. Another 19% of the purchase price was allocated to a non-compete agreement with an amortizable life of seven years. The remainder of the purchase price has been allocated to goodwill. On January 3, 2011, Middleburg Investment Advisors was merged into Middleburg Trust Company and its goodwill balance is reflected in the total goodwill balance reported for Middleburg Investment Group of $3.4 million. The remaining balance of unamortized identified intangible assets related to the acquisition of Middleburg Investment Advisors is approximately $600,000. Approximately $1.0 million of the $5.9 million in total intangible assets and goodwill at September 30, 2013 was attributable directly to the Company’s investment in Middleburg Trust Company exclusive of the goodwill related to the former Middleburg Investment Advisors. With the consolidation of Southern Trust Mortgage, the Company recognized $1.9 million in goodwill as part of its equity investment.
The purchase price allocation process requires management estimates and judgment as to expectations for the life span of various customer relationships as well as the value that key members of management add to the success of the Company. For example, customer attrition rates were determined based upon assumptions that the past five years may predict the future. If the actual attrition rates, among other assumptions, differed from the estimates and judgments used in the purchase price allocation, the amounts recorded in the Consolidated Financial Statements could result in a possible impairment of the intangible assets and goodwill or require acceleration in the amortization expense.
In addition, current accounting standards permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two step goodwill impairment test. If a two step process is necessary, the first step is to identify whether or not any impairment exists. The second step measures the amount of the impairment loss, if any. The most recent evaluation of the Company's goodwill balance was conducted as of December 31, 2012.
As of September 30, 2013, the Company recognized two consolidated subsidiaries as reporting units for the purpose of goodwill evaluation and reporting: Southern Trust Mortgage (“STM”) and Middleburg Investment Group (“MIG”). MIG is the parent company of Middleburg Trust Company and the former Middleburg Investment Advisors. The following table shows the allocation of goodwill between the two reporting units and the percentage by which the fair value of each reporting unit as of December 31, 2012 (the most recent fair value evaluation date) exceeded the carrying value as of that date. Management does not believe the estimated fair values have changed significantly from December 31, 2012 to September 30, 2013.
|
| | | | | | | | | | | | | | | | | |
| | Allocation of Goodwill to Reporting Units |
| | | | (Dollars in Thousands) | | |
| | Carrying Value of Goodwill | | (1) Carrying Value of Reporting Unit | | | | (1) Estimated Fair Value of Reporting Unit | | (1) Percentage by which Estimated Fair Value of Reporting Unit Exceeds Carrying Value |
Reporting Unit | | December 31, 2012 | | December 31, 2012 | | | | December 31, 2012 | | |
STM | | $ | 1,867 |
| | $ | 7,880 |
| | | | $ | 10,040 |
| | 27.41 | % |
MIG | | 3,422 |
| | 6,244 |
| | (2) | | 9,167 |
| | 46.81 | % |
Total | | $ | 5,289 |
| | $ | 14,124 |
| | | | $ | 19,207 |
| | 35.99 | % |
| |
(1) | Reported amounts reflect only Middleburg Financial Corporation shareholders' ownership interests. Estimated fair values are as of December 31, 2012. |
| |
(2) | Includes $728,000 of amortizing intangible assets at December 31, 2012. |
Management estimates fair value utilizing multiple methodologies which include discounted cash flows, comparable companies, third-party sale and assets under management analysis. Determining the fair value of the Company’s reporting units requires management to make judgments and assumptions related to various items, including estimates of future operating results, allocations of indirect expenses, and discount rates. Management believes its estimates and assumptions are reasonable; however, the fair value of each reporting unit could be different in the future if actual results or market conditions differ from the estimates and assumptions used.
The Company’s forecasted cash flows for its reporting units assume a stable economic environment and consistent long-term growth in loan originations and assets under management over the projected periods. Additionally, expenses are assumed to be consistently correlated with projected asset and revenue growth over the time periods projected. Although we believe the key assumptions underlying the financial forecasts to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond the control of the Company. Accordingly, there can be no assurance that the forecasted results will be realized and variations from the forecast may be material. If weak economic conditions continue or worsen for a prolonged period of time, or if the reporting unit loses key personnel, the fair value of the reporting unit may be adversely affected which may result in impairment of goodwill or other intangible assets in the future. Any changes in the key management estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company’s financial condition and results of operations.
Financial Condition
Assets, Liabilities and Shareholders’ Equity
Total assets for the Company were $1.2 billion at September 30, 2013, a decrease of $21.5 million or 1.7% compared to total assets at December 31, 2012. Total average assets and total average liabilities remained relatively unchanged for the nine months ended September 30, 2013 compared to the the nine months ended September 30, 2012. Total liabilities were $1.10 billion at September 30, 2013, compared to $1.12 billion at December 31, 2012. Average shareholders’ equity increased 4.3% or $4.7 million over the same periods.
Loans
Total loans, including loans held for sale, at September 30, 2013 were $758.0 million, a decrease of $33.6 million from the December 31, 2012 amount of $791.6 million, primarily as a result of a decrease in loans held for sale. Portfolio loans were $716.1 million at September 30, 2013, an increase of $6.6 million from the December 31, 2012 balance of $709.5 million. Loans held for sale were $41.9 million at September 30, 2013, compared to $82.1 million at December 31, 2012, a decrease of $40.3 million during the period. Southern Trust Mortgage originated $590.4 million in loans for the nine months ended September 30, 2013, compared to $444.6 million for the nine months ended September 30, 2012. The Company experienced a decrease in real estate construction loans, which were $37.2 million at September 30, 2013, compared to $50.2 million at December 31, 2012. Real estate mortgage loans of $531.1 million at September 30, 2013 increased from the December 31, 2012 amount of $515.6 million. Commercial loans, which are primarily loans to businesses, increased to $123.3 million at September 30, 2013, compared to $118.6 million at December 31, 2012. Net charge-offs were $928,000 for the nine months ended September 30, 2013 versus $2.8 million for the same period in 2012. The provision for loan losses for the three months ended September 30, 2013 was $3,000 compared to $635,000 for the same period in 2012. As a result of the decline in non-performing assets and charge-offs and improving credit quality trends, the Company recorded a negative loan loss provision of $1,000 for the nine months ended
September 30, 2013 compared to a provision of $2.2 million for the same period in 2012. The allowance for loan losses at September 30, 2013 was $13.4 million or 1.87% of portfolio loans outstanding (excluding loans held for sale) compared to $14.3 million and 2.02% at December 31, 2012.
The following table presents information on the Company’s nonperforming assets as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| Nonperforming Assets |
| September 30, | | December 31, |
| 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| (In thousands) |
Non-performing assets: | | | | | | | | | |
Non-accrual loans | $ | 20,525 |
| | $ | 21,664 |
| | $ | 25,346 |
| | $ | 29,386 |
| | $ | 8,606 |
|
Restructured loans (1) | 4,820 |
| | 5,132 |
| | 3,853 |
| | 1,254 |
| | 2,096 |
|
Accruing loans greater than 90 days past due | 636 |
| | 1,044 |
| | 1,233 |
| | 909 |
| | 908 |
|
Total non-performing loans | $ | 25,981 |
| | $ | 27,840 |
| | $ | 30,432 |
| | $ | 31,549 |
| | $ | 11,610 |
|
Foreclosed property | 4,530 |
| | 9,929 |
| | 8,535 |
| | 8,394 |
| | 6,511 |
|
Total non-performing assets | $ | 30,511 |
| | $ | 37,769 |
| | $ | 38,967 |
| | $ | 39,943 |
| | $ | 18,121 |
|
| | | | | | | | | |
Allowance for loan losses | $ | 13,382 |
| | $ | 14,311 |
| | $ | 14,623 |
| | $ | 14,967 |
| | $ | 9,185 |
|
| |
| | |
| | |
| | |
| | |
|
Non-performing loans to period end portfolio loans | 3.63 | % | | 3.92 | % | | 4.53 | % | | 4.79 | % | | 1.80 | % |
Allowance for loan losses to non-performing loans | 51.51 | % | | 51.40 | % | | 48.05 | % | | 47.44 | % | | 79.11 | % |
Non-performing assets to period end assets | 2.51 | % | | 3.05 | % | | 3.27 | % | | 3.62 | % | | 1.86 | % |
(1) Amount reflects restructured loans that are performing as agreed to the restructured terms and are not included in non-accrual loans.
The Company utilizes the ratios included in the above table to evaluate the relative level of non-performing assets included in the Company’s balance sheet. Changes in the ratios assist management in evaluating the overall adequacy of the allowance for loan losses and any reserve against other real estate owned.
Our accounting policy for foreclosed property does not include any allowance for loan loss amounts subsequent to the reclassification event which adjusts the loan balance to fair value when moved into foreclosed property.
The following table depicts the transactions, in summary form, that occurred to the allowance for loan losses in each period presented:
|
| | | | | | | |
Allowance for Loan Losses |
| Nine Months Ended | | Year Ended |
| September 30, 2013 | | December 31, 2012 |
Balance, beginning of year | $ | 14,311 |
| | $ | 14,623 |
|
Provision for (recovery of) loan losses | (1 | ) | | 3,438 |
|
Charge-offs: | |
| | |
|
Real estate construction | 194 |
| | 2,152 |
|
Real estate secured by 1-4 family residential | 783 |
| | 893 |
|
Other real estate loans | 97 |
| | 760 |
|
Commercial loans | 38 |
| | 394 |
|
Consumer loans | 28 |
| | 72 |
|
Total charge-offs | $ | 1,140 |
| | $ | 4,271 |
|
Recoveries: | |
| | |
|
Real estate construction | $ | 47 |
| | $ | 2 |
|
Real estate secured by 1-4 family residential | 109 |
| | 388 |
|
Other real estate loans | 30 |
| | 86 |
|
Commercial loans | 7 |
| | 12 |
|
Consumer loans | 19 |
| | 33 |
|
Total recoveries | $ | 212 |
| | $ | 521 |
|
Net charge-offs | 928 |
| | 3,750 |
|
Balance, end of period | $ | 13,382 |
| | $ | 14,311 |
|
| | | |
Ratio of allowance for loan losses to portfolio loans outstanding at end of period | 1.87 | % | | 2.02 | % |
Annualized ratio of net charge-offs to average portfolio loans outstanding during the period | 0.16 | % | | 0.54 | % |
The following table shows the balance of the allowance for loan losses allocated to each major loan type and the percent of loans in each category to total loans as of September 30, 2013 and December 31, 2012:
|
| | | | | | | | | | | | | |
Allocation of Allowance for Loan Losses |
| September 30, 2013 | | Percent of loans in each category to total loans | | December 31, 2012 | | Percent of loans in each category to total loans |
Commercial, financial and agricultural | $ | 1,790 |
| | 17.2 | % | | $ | 2,233 |
| | 18.4 | % |
Real estate construction | 1,368 |
| | 5.2 | % | | 1,258 |
| | 7.1 | % |
Real estate mortgage | 10,017 |
| | 75.8 | % | | 10,624 |
| | 72.7 | % |
Consumer loans | 207 |
| | 1.8 | % | | 196 |
| | 1.9 | % |
Totals | $ | 13,382 |
| | 100.0 | % | | $ | 14,311 |
| | 100.0 | % |
Non-performing Loans
Non-performing loans were $26.0 million at September 30, 2013 compared to $27.8 million at December 31, 2012.
Non-accrual loans were $20.5 million at the end of the third quarter of 2013 compared to $21.7 million as of December 31, 2012, representing a decrease of 5.5% during the first nine months of 2013. The decrease was primarily attributable to non-accrual loans being charged-off or transferred to other real estate owned during the period.
Restructured Loans
Included in the "Non-performing Assets" table above are troubled debt restructurings (“TDRs”) that were classified as impaired. The total balance of TDRs at September 30, 2013 was $15.8 million of which $11.0 million were included in the Company’s non-accrual loan totals at that date and $4.8 million represented loans performing as agreed according to the restructured terms. The total amount of TDRs at September 30, 2013 represents an increase of $3.8 million or 31.7% from the amount at December 31, 2012 of $12.0 million. The amount of the valuation allowance related to total TDRs was $2.6 million and $2.0 million as of September 30, 2013 and December 31, 2012 respectively.
The $11.0 million in non-accrual TDRs as of September 30, 2013 is comprised of $651,000 in real estate construction loans, $5.4 million in 1-4 family real estate loans, $4.9 million in other real estate loans, and $80,000 in commercial loans. The $4.8 million in TDRs which were performing as agreed under restructured terms as of September 30, 2013 is comprised of $1.1 million in 1-4
family real estate loans, $3.1 million in other real estate loans and $642,000 in commercial loans. The Company considers all loans classified as TDRs to be impaired.
The Company requires six timely consecutive monthly payments before a restructured loan that has been placed on non-accrual can be returned to accrual status. The Company does not utilize formal modification programs or packages when loans are considered for restructuring. Any loan restructuring is based on the borrower’s circumstances and may include modifications to more than one of the terms and conditions of the loan.
The Company has not performed any commercial real estate or other type of loan workout whereby the existing loan would have been structured into multiple new loans.
Other Real Estate Owned
Other real estate owned (OREO), net of valuation allowance, decreased by $5.4 million to $4.5 million at September 30, 2013 from $9.9 million at December 31, 2012. The decrease was primarily due to the sale of several large OREO properties during the period. The change in balance is the net of foreclosed real estate loans added to OREO, valuation adjustments and sales of OREO properties during the period. During the nine months ended September 30, 2013, the Company received proceeds of $6.8 million from the sale of OREO properties and incurred a net loss of $747,000 on the sales. Valuation adjustments of $235,000 were recorded for properties held in OREO during the nine months ended September 30, 2013.
Securities
Securities, excluding Federal Reserve and Federal Home Loan Bank stock, were $328.4 million at September 30, 2013 compared to $319.5 million at December 31, 2012, an increase of $8.9 million or 2.8% during the period. The balance in interest-bearing deposits with other institutions increased to $53.2 million as of September 30, 2013 compared to $47.3 million at December 31, 2012. The Company sold $12.7 million in securities, received proceeds of $70.5 million from maturities and principal payments, and purchased securities of $103.4 million for the nine months ended September 30, 2013. No losses related to other-than-temporary impairments were recognized for the nine months ended September 30, 2013. For more information about the Company's securities available for sale, including a description of securities in an unrealized loss position at September 30, 2013 and December 31, 2012, see Note 3 to the consolidated financial statements filed with this Report.
The Company will continue to maintain its securities portfolio as a source of liquidity and collateral. At September 30, 2013, the year-to-date tax equivalent yield on the securities portfolio was 3.02%.
Premises and Equipment
Net premises and equipment decreased by $122,000 from $20.6 million at December 31, 2012 to $20.5 million at September 30, 2013. The decrease is the net of the change in accumulated depreciation and additions to premises and equipment during the period.
Goodwill and Other Identified Intangibles
Goodwill and other identified intangibles decreased by $128,000 in the first nine months of 2013 to $5.9 million at September 30, 2013 as the result of amortization of identified intangibles related to the acquisition of Middleburg Investment Advisors.
Other Assets
Other assets increased by $2.7 million to $41.8 million at September 30, 2013 when compared to December 31, 2012. The other assets section of the balance sheet includes Bank Owned Life Insurance (BOLI), in the amount of $16.9 million and net deferred tax assets in the amount of $7.2 million at September 30, 2013.
Deposits
Deposits decreased by $23.3 million to $958.6 million at September 30, 2013 from $981.9 million at December 31, 2012. Average deposits for the nine months ended September 30, 2013 increased 2.9% or $26.9 million compared to average deposits for the nine months ended September 30, 2012. Average interest bearing deposits were $791.4 million for the nine months ended September 30, 2013 compared to $801.1 million for the nine months ended September 30, 2012, primarily due to increases in average balances of interest checking and money market savings accounts, partially offset by a decrease in balances of time deposits.
The Company has an interest bearing product, known as Tredegar Institutional Select, that integrates the use of the cash within client accounts at Middleburg Trust Company for overnight funding at the Bank. The overall balance of this product was $29.65 million at September 30, 2013, $54.58 million as of December 31, 2012 and $56.43 million as of September 30, 2012 and is reflected in both the savings and interest bearing demand deposits and securities sold under agreements to repurchase amounts on the balance sheet. The primary reason for the declining balances is due to cash going back into the market as a result of a more favorable marketplace and increasing investor confidence.
Time deposits decreased by $19.5 million or 6.7% from December 31, 2012 to $272.5 million at September 30, 2013. Time deposits include brokered certificates of deposit and CDARS deposits. Securities sold under agreements to repurchase (“Repo Accounts”) increased by $1.0 million from $34.0 million at December 31, 2012 to $35.0 million at September 30, 2013. The Repo Accounts include certain long-term commercial checking accounts with average balances that typically exceed $100,000 and the Tredegar Institutional Select account which includes accounts maintained by Middleburg Trust Company’s business clients. All repurchase agreement transactions entered into by the Company are accounted for as collateralized financings and not as sales.
Short-term Borrowings and FHLB Borrowings
The Company had no overnight advances from the Federal Home Loan Bank of Atlanta (“FHLB”) outstanding at September 30, 2013. Southern Trust Mortgage has a line of credit with a regional bank that is primarily used to fund its loans held for sale. At September 30, 2013, this line had an outstanding balance of $5.5 million compared to $11.9 million at December 31, 2012. The interest rate on the line of credit is based on the 30-day London Inter-Bank Offered Rate (“LIBOR”). Southern Trust Mortgage also has a $5.0 million line of credit and a $75.0 million participation agreement with Middleburg Bank. The line of credit and the outstanding balance under the participation agreement are eliminated in the consolidation process and are not reflected in the consolidated financial statements of the Company. FHLB term advances were $85.0 million at September 30, 2013 compared to $77.9 million at December 31, 2012.
Other Liabilities
Other liabilities increased by $2.1 million to $11.0 million at September 30, 2013, when compared to December 31, 2012. The primary component of this increase was Middleburg Bank's additional subscription in housing equity funds that provide future tax credits.
Non-controlling Interest in Consolidated Subsidiary
The Company, through Middleburg Bank owns 62.3% of the issued and outstanding membership interest units in Southern Trust Mortgage. The remaining 37.7% of issued and outstanding membership interest units are owned by other partners. The ownership interest of these partners is represented in the financial statements as “Non-controlling Interest in Consolidated Subsidiary.” The non-controlling interest is reflected in total shareholders’ equity. Southern Trust Mortgage also has preferred stock of $1.6 million issued and outstanding at September 30, 2013. As of September 30, 2013, the Company, through Middleburg Bank owned 83.5% of the issued and outstanding preferred stock in Southern Trust Mortgage. The remaining 16.5% of issued and outstanding preferred stock is owned by other partners. The preferred stock held by these other partners is reflected in other liabilities.
Capital
Total shareholders’ equity, including the non-controlling interest in Southern Trust Mortgage, was $115.2 million at September 30, 2013. This amount represents a decrease of 1.7% from the December 31, 2012 amount of $117.1 million. Middleburg Financial Corporation’s shareholders’ equity, which excludes the non-controlling interest, was $112.4 million at September 30, 2013 compared to $113.9 million at December 31, 2012. The book value of common stock was $15.86 per share at September 30, 2013 and $16.15 at December 31, 2012. The primary reason for the decline in shareholder's equity and book value of common stock during the first nine months was a decline in accumulated other comprehensive income, resulting from unrealized losses in available for sale securities. The following table shows the Company’s risk-based capital ratios as of September 30, 2013 and December 31, 2012:
|
| | | | |
| September 30, 2013 | | December 31, 2012 |
Total risk-based capital ratio | 15.8 | % | | 15.3% |
Tier 1 risk-based capital ratio | 14.6 | % | | 14.0% |
Tier 1 leverage ratio | 9.4 | % | | 9.1% |
Results of Operations
Net Interest Income
Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on earning assets and the interest expense paid on deposits and other interest bearing liabilities.
Net interest income for the three months ended September 30, 2013 was $9.3 million, which was relatively unchanged from the same period in 2012. Total interest income for the three months ended September 30, 2013 was $11.0 million compared to $11.4 million for the three months ended September 30, 2012 representing a decrease of 4.0%. Total interest expense was $1.6 million for the three months ended September 30, 2013 compared to $2.2 million for the same period in 2012 representing a decrease of 25.4%. Average earning assets increased by $6.2 million to $1.2 billion for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Average interest bearing liabilities decreased by $28.9 million or 3.1% to $911.3 million for the three months ended September 30, 2013 when compared to the same period in 2012.
Net interest income for the nine months ended September 30, 2013 was $28.1 million, compared to $28.6 million for the same period in 2012. Total interest income for the nine months ended September 30, 2013 was $33.2 million compared to $35.6 million for the nine months ended September 30, 2012 representing a decrease of 6.8%. Total interest expense was $5.1 million for the nine months ended September 30, 2013 compared to $6.9 million for the same period in 2012 representing a decrease of 26.8%. Average earning assets increased by $14.7 million to $1.1 billion for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Average interest bearing liabilities decreased by $11.0 million or 1.2% to $918.0 million for the nine months ended September 30, 2013 when compared to the same period in 2012.
The following tables reflect an analysis of the Company’s net interest income using the daily average balances of the Company’s assets and liabilities for the periods indicated. Non-accrual loans are included in the loan balances.
|
| | | | | | | | | | | | | | | | | | | | | |
| Average Balances, Income and Expenses, Yields and Rates |
| Three months ended September 30, |
| | | 2013 | | | | | | 2012 | | |
| Average Balance | | Income/ Expense | | Yield/ Rate (2) | | Average Balance | | Income/ Expense | | Yield/ Rate (2) |
| (Dollars in thousands) |
Assets : | | | | | | | | | | | |
Securities: | | | | | | | | | | | |
Taxable | $ | 266,197 |
| | $ | 1,527 |
| | 2.28 | % | | $ | 264,234 |
| | $ | 1,583 |
| | 2.38 | % |
Tax-exempt (1) | 64,678 |
| | 970 |
| | 5.95 | % | | 62,175 |
| | 903 |
| | 5.78 | % |
Total securities | $ | 330,875 |
| | $ | 2,497 |
| | 2.99 | % | | $ | 326,409 |
| | $ | 2,486 |
| | 3.03 | % |
Loans | | | | | | | | | | | |
Taxable | $ | 748,145 |
| | $ | 8,738 |
| | 4.63 | % | | $ | 760,442 |
| | $ | 9,189 |
| | 4.81 | % |
Tax-exempt (1) | 687 |
| | 9 |
| | 5.2 | % | | — |
| | — |
| | — |
|
Total loans (3) | $ | 748,832 |
| | $ | 8,747 |
| | 4.63 | % | | $ | 760,442 |
| | $ | 9,189 |
| | 4.81 | % |
Interest bearing deposits in other institutions | 70,710 |
| | 43 |
| | 0.24 | % | | 69,802 |
| | 39 |
| | 0.22 | % |
Total earning assets | $ | 1,150,417 |
| | $ | 11,287 |
| | 3.89 | % | | $ | 1,156,653 |
| | $ | 11,714 |
| | 4.03 | % |
Less: allowances for loan losses | (13,555 | ) | | | | | | (15,202 | ) | | |
| | |
Total non-earning assets | 81,287 |
| | | | | | 84,082 |
| | |
| | |
Total assets | $ | 1,218,149 |
| | |
| | | | $ | 1,225,533 |
| | |
| | |
Liabilities: | |
| | |
| | | | |
| | |
| | |
Interest-bearing deposits: | |
| | |
| | | | |
| | |
| | |
Checking | $ | 314,504 |
| | $ | 210 |
| | 0.26 | % | | $ | 342,360 |
| | $ | 299 |
| | 0.35 | % |
Regular savings | 110,904 |
| | 63 |
| | 0.23 | % | | 105,716 |
| | 79 |
| | 0.30 | % |
Money market savings | 73,625 |
| | 41 |
| | 0.22 | % | | 66,859 |
| | 50 |
| | 0.30 | % |
Time deposits: | | | | | | | | | | | |
$100,000 and over | 136,730 |
| | 388 |
| | 1.13 | % | | 144,566 |
| | 535 |
| | 1.47 | % |
Under $100,000 | 140,643 |
| | 489 |
| | 1.38 | % | | 159,693 |
| | 765 |
| | 1.91 | % |
Total interest-bearing deposits | $ | 776,406 |
| | $ | 1,191 |
| | 0.61 | % | | $ | 819,194 |
| | $ | 1,728 |
| | 0.84 | % |
Short-term borrowings | 7,217 |
| | 59 |
| | 3.24 | % | | 6,531 |
| | 74 |
| | 4.51 | % |
Securities sold under agreements to repurchase | 37,566 |
| | 82 |
| | 0.87 | % | | 34,805 |
| | 83 |
| | 0.95 | % |
FHLB borrowings and subordinated notes | 90,155 |
| | 302 |
| | 1.33 | % | | 79,697 |
| | 305 |
| | 1.52 | % |
Total interest-bearing liabilities | $ | 911,344 |
| | $ | 1,634 |
| | 0.71 | % | | $ | 940,227 |
| | $ | 2,190 |
| | 0.93 | % |
Non-interest bearing liabilities | |
| | |
| | | | |
| | |
| | |
Demand Deposits | 183,539 |
| | | | | | 164,261 |
| | |
| | |
Other liabilities | 8,467 |
| | | | | | 6,600 |
| | |
| | |
Total liabilities | $ | 1,103,350 |
| | |
| | | | $ | 1,111,088 |
| | |
| | |
Non-controlling interest | 2,766 |
| | | | | | 2,920 |
| | |
| | |
Shareholders' equity | 112,033 |
| | | | | | 111,525 |
| | |
| | |
Total liabilities and shareholders' equity | $ | 1,218,149 |
| | |
| | | | $ | 1,225,533 |
| | |
| | |
Net interest income | |
| | $ | 9,653 |
| | | | |
| | $ | 9,524 |
| | |
Interest rate spread | |
| | |
| | 3.18 | % | | | | | | 3.10 | % |
Cost of Funds | |
| | |
| | 0.59 | % | | | |
|
| | 0.79 | % |
Interest expense as a percent of average earning assets | |
| | |
| | 0.56 | % | | | | | | 0.75 | % |
Net interest margin | |
| | |
| | 3.33 | % | | | | | | 3.28 | % |
| |
(1) | Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%. |
| |
(2) | All yields and rates have been annualized on a 365 day year for 2013 and a 366 day year for 2012. |
| |
(3) | Total average loans include loans on non-accrual status and loans held for sale. |
The following tables reflect an analysis of the Company’s net interest income using the daily average balances of the Company’s assets and liabilities for the periods indicated. Non-accrual loans are included in the loan balances.
|
| | | | | | | | | | | | | | | | | | | | | |
| Average Balances, Income and Expenses, Yields and Rates |
| Nine months ended September 30, |
| | | 2013 | | | | | | 2012 | | |
| Average Balance | | Income/ Expense | | Yield/ Rate (2) | | Average Balance | | Income/ Expense | | Yield/ Rate (2) |
| (Dollars in thousands) |
Assets : | | | | | | | | | | | |
Securities: | | | | | | | | | | | |
Taxable | $ | 266,847 |
| | $ | 4,636 |
| | 2.32 | % | | $ | 263,981 |
| | $ | 5,111 |
| | 2.59 | % |
Tax-exempt (1) | 67,097 |
| | 2,904 |
| | 5.79 | % | | 61,867 |
| | 2,726 |
| | 5.89 | % |
Total securities | $ | 333,944 |
| | $ | 7,540 |
| | 3.02 | % | | $ | 325,848 |
| | $ | 7,837 |
| | 3.21 | % |
Loans: | | | | | | | | | | | |
Taxable | $ | 754,621 |
| | $ | 26,486 |
| | 4.69 | % | | $ | 751,943 |
| | $ | 28,565 |
| | 5.07 | % |
Tax-exempt (1) | 687 |
| | 27 |
| | 5.25 | % | | — |
| | — |
| | 0.00 | % |
Total loans (3) | $ | 755,308 |
| | $ | 26,513 |
| | 4.69 | % | | $ | 751,943 |
| | $ | 28,565 |
| | 5.07 | % |
Interest bearing deposits in other institutions | 58,042 |
| | 101 |
| | 0.23 | % | | 54,772 |
| | 88 |
| | 0.21 | % |
Total earning assets | $ | 1,147,294 |
| | $ | 34,154 |
| | 3.98 | % | | $ | 1,132,563 |
| | $ | 36,490 |
| | 4.30 | % |
Less: allowances for loan losses | (13,770 | ) | | | | | | (15,071 | ) | | | | |
Total non-earning assets | 81,990 |
| | | | | | 83,114 |
| | | | |
Total assets | $ | 1,215,514 |
| | | | | | $ | 1,200,606 |
| | | | |
Liabilities: | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Checking | $ | 322,344 |
| | $ | 656 |
| | 0.27 | % | | $ | 318,841 |
| | $ | 1,017 |
| | 0.43 | % |
Regular savings | 110,132 |
| | 185 |
| | 0.22 | % | | 105,816 |
| | 290 |
| | 0.37 | % |
Money market savings | 75,798 |
| | 131 |
| | 0.23 | % | | 60,373 |
| | 156 |
| | 0.35 | % |
Time deposits: | | | | | | | | | | | |
$100,000 and over | 141,048 |
| | 1,327 |
| | 1.26 | % | | 142,503 |
| | 1,666 |
| | 1.56 | % |
Under $100,000 | 142,070 |
| | 1,518 |
| | 1.43 | % | | 173,559 |
| | 2,338 |
| | 1.80 | % |
Total interest-bearing deposits | $ | 791,392 |
| | $ | 3,817 |
| | 0.64 | % | | $ | 801,092 |
| | $ | 5,467 |
| | 0.91 | % |
Short-term borrowings | 4,005 |
| | 106 |
| | 3.54 | % | | 9,195 |
| | 311 |
| | 4.52 | % |
Securities sold under agreements to repurchase | 35,303 |
| | 243 |
| | 0.92 | % | | 33,737 |
| | 250 |
| | 0.99 | % |
FHLB borrowings and subordinated notes | 87,274 |
| | 896 |
| | 1.37 | % | | 84,965 |
| | 889 |
| | 1.40 | % |
Total interest-bearing liabilities | $ | 917,974 |
| | $ | 5,062 |
| | 0.74 | % | | $ | 928,989 |
| | $ | 6,917 |
| | 0.99 | % |
Non-interest bearing liabilities | | | | | | | | | | | |
Demand Deposits | 172,751 |
| | | | | | 153,069 |
| | | | |
Other liabilities | 7,691 |
| | | | | | 6,557 |
| | | | |
Total liabilities | $ | 1,098,416 |
| | | | | | $ | 1,088,615 |
| | | | |
Non-controlling interest | 2,882 |
| | | | | | 2,504 |
| | | | |
Shareholders' equity | 114,216 |
| | | | | | 109,487 |
| | | | |
Total liabilities and shareholders' equity | $ | 1,215,514 |
| | | | | | $ | 1,200,606 |
| | | | |
Net interest income | | | $ | 29,092 |
| | | | | | $ | 29,573 |
| | |
Interest rate spread | | | | | 3.24 | % | | | | | | 3.31 | % |
Cost of Funds | | | | | 0.62 | % | | | | | | 0.85 | % |
Interest expense as a percent of average earning assets | | | | | 0.59 | % | | | | | | 0.82 | % |
Net interest margin | | | | | 3.39 | % | | | | | | 3.49 | % |
| |
(1) | Income and yields are reported on tax equivalent basis assuming a federal tax rate of 34%. |
| |
(2) | All yields and rates have been annualized on a 365 day year for 2013 and a 366 day year for 2012. |
| |
(3) | Total average loans include loans on non-accrual status and loans held for sale. |
For the three months ended September 30, 2013, interest and fees from loans was $8.7 million compared to $9.2 million for the three months ended September 30, 2012. The tax equivalent weighted average yield of loans decreased 18 basis points from 4.81% for the three months ended September 30, 2012 to 4.63% for the three months ended September 30, 2013.
For the nine months ended September 30, 2013, interest and fees from loans was $26.5 million compared to $28.6 million for the nine months ended September 30, 2012. The tax equivalent weighted average yield of loans decreased 38 basis points from 5.07% for the nine months ended September 30, 2012 to 4.69% for the nine months ended September 30, 2013.
For the nine months ended September 30, 2013, interest income from the securities portfolio and invested liquid funds decreased by $344,000 to $6.7 million compared to the same period in 2012. The tax equivalent yield on securities for the nine months ended September 30, 2013 decreased 19 basis points to 3.02% compared to 3.21% for the nine months ended September 30, 2012.
Interest expense on deposits was $1.6 million for the three months ended September 30, 2013. Interest expense on deposits for the three months ended September 30, 2013, decreased by $556,000 or 25.4% compared to the same period in 2012. For the three months ended September 30, 2013, average deposits decreased by $23.5 million to $959.9 million compared to the same period in 2012. The deposit portfolio included 71.6% in demand and savings deposits, and 28.4% in time deposits at September 30, 2013. At December 31, 2012, the deposit portfolio included 70.3% in demand and savings deposits, and 29.7% in time deposits.
Interest expense on deposits was $5.1 million for the nine months ended September 30, 2013. Interest expense on deposits for the nine months ended September 30, 2013, decreased by $1.9 million or 26.8% compared to the same period in 2012. For the nine months ended September 30, 2013, average deposits increased by $10.0 million to $964.1 million compared to the same period in 2012.
Interest expense for securities sold under agreements to repurchase decreased to $82,000 for the three months ended September 30, 2013 from $83,000 for the three months ended September 30, 2012. Interest expense related to short-term borrowings decreased by $15,000 compared to the three months ended September 30, 2012. Interest expense related to FHLB borrowings and other debt decreased by $2,000 from $305,000 for the three months ended September 30, 2012 to $303,000 for the three months ended September 30, 2013.
Interest expense for securities sold under agreements to repurchase decreased to $243,000 for the nine months ended September 30, 2013 from $250,000 for the nine months ended September 30, 2012. Interest expense related to short-term borrowings decreased by $205,000 compared to the nine months ended September 30, 2012. Interest expense related to FHLB borrowings and other debt increased by $7,000 from $889,000 for the nine months ended September 30, 2012 to $896,000 for the nine months ended September 30, 2013.
Average balances in interest checking, regular savings and money market accounts decreased by $15.9 million when comparing the three months ended September 30, 2013 to the same period in 2012. The average balance of certificates of deposits decreased by $26.9 million when comparing the three months ended September 30, 2013 to the three months ended September 30, 2012. The weighted average cost of the Company’s interest bearing deposits was 0.61% for the three months ended September 30, 2013 compared to 0.84% for the three months ended September 30, 2012, resulting in a decrease of 23 basis points.
Average balances in interest checking, regular savings and money market accounts increased by $23.2 million when comparing the nine months ended September 30, 2013 to the same period in 2012. The average balance of certificates of deposits decreased by $32.9 million when comparing the nine months ended September 30, 2013 to the nine months ended September 30, 2012. The weighted average cost of the Company’s interest bearing deposits was 0.64% for the nine months ended September 30, 2013 compared to 0.91% for the nine months ended September 30, 2012, resulting in a decrease of 27 basis points.
The net interest margin, on a tax equivalent basis, was 3.33% for the three months ended September 30, 2013 compared to 3.28% for the three month period ended September 30, 2012. The average yield on earning assets was 3.89% for the quarter ended September 30, 2013 compared to 4.03% for the quarter ended September 30, 2012, representing a decrease of 14 basis points. The decline in net interest margin for the quarter ended September30, 2013 compared to the previous quarter was principally due to a reduction in interest income from loans during the quarter.
The net interest margin, on a tax equivalent basis, was 3.39% for the nine months ended September 30, 2013 compared to 3.49% for the nine month period ended September 30, 2012. The average yield on earning assets was 3.98% for the nine months ended September 30, 2013 compared to 4.30% for the same period ended September 30, 2012, representing a decrease of 32 basis points. The decline in net interest margin for the nine months ended September 30, 2013 compared to the previous quarter was principally due to a reduction in interest income during the period.
The Company’s net interest margin is not a measurement under accounting principles generally accepted in the United States, but it is a common measure used by the financial service industry to determine how profitably earning assets are funded. The net interest margin is calculated by dividing tax equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is non taxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 34.0% for all periods presented. The reconciliation of tax equivalent net interest income, which is not a measurement under accounting principles generally accepted in the United States, to net interest income is reflected in the table below.
Reconciliation of Net Interest Income to
Tax Equivalent Net Interest Income
|
| | | | | | | |
| For the three months ended September 30, |
Earnings Per Share | 2013 | | 2012 |
GAAP measures: | (in thousands) |
Interest Income – Loans | $ | 8,744 |
| | $ | 9,189 |
|
Interest Income - Investments & Other | 2,210 |
| | 2,218 |
|
Interest Expense – Deposits | 1,190 |
| | 1,728 |
|
Interest Expense - Other Borrowings | 444 |
| | 462 |
|
Total Net Interest Income | $ | 9,320 |
| | $ | 9,217 |
|
NON-GAAP measures: | |
| | |
|
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities and Loans | 333 |
| | 307 |
|
Total Tax Benefit Realized on Non-Taxable Interest Income | $ | 333 |
| | $ | 307 |
|
Total Tax Equivalent Net Interest Income | $ | 9,653 |
| | $ | 9,524 |
|
| | | |
| | | |
| For the nine months ended September 30, |
Earnings Per Share | 2013 | | 2012 |
GAAP measures: | (in thousands) |
Interest Income – Loans | $ | 26,504 |
| | $ | 28,565 |
|
Interest Income - Investments & Other | 6,654 |
| | 6,998 |
|
Interest Expense – Deposits | 3,817 |
| | 5,467 |
|
Interest Expense - Other Borrowings | 1,245 |
| | 1,450 |
|
Total Net Interest Income | $ | 28,096 |
| | $ | 28,646 |
|
NON-GAAP measures: | |
| | |
|
Tax Benefit Realized on Non-Taxable Interest Income - Municipal Securities and Loans | 996 |
| | 927 |
|
Total Tax Benefit Realized on Non-Taxable Interest Income | $ | 996 |
| | $ | 927 |
|
| $ | 29,092 |
| | $ | 29,573 |
|
Non-interest Income
Non-interest income includes, among other items, income from the Company’s 62.3% ownership interest in Southern Trust Mortgage, LLC. Other income also includes fees generated by the retail banking and investment services departments of the Bank and by Middleburg Trust Company.
The following table presents dollar and percentage changes in components of non-interest income for the three and nine month periods ended September 30, 2013 and September 30, 2012:
|
| | | | | | | | | | | | | | | |
Non-Interest Income |
(in thousands) |
| | | | | | | | |
| | For the three months ended | | | | |
| | September 30, | | September 30, | | Dollar | | Percent |
| | 2013 | | 2012 | | Change | | Change |
| | | | | | | | |
Service charges on deposit accounts | | $ | 590 |
| | $ | 557 |
| | $ | 33 |
| | 5.9 | % |
Trust service income | | 963 |
| | 928 |
| | 35 |
| | 3.8 | % |
Gains on loans held for sale | | 4,162 |
| | 6,161 |
| | (1,999 | ) | | (32.4 | )% |
Net gains on securities available for sale | | 23 |
| | 164 |
| | (141 | ) | | (86.0 | )% |
Commissions on investment sales | | 159 |
| | 117 |
| | 42 |
| | 35.9 | % |
Fees on mortgages held for sale | | 28 |
| | 37 |
| | (9 | ) | | (24.3 | )% |
Bank owned life insurance | | 125 |
| | 118 |
| | 7 |
| | 5.9 | % |
Other operating income | | 78 |
| | 236 |
| | (158 | ) | | (66.9 | )% |
Total non-interest income | | $ | 6,128 |
| | $ | 8,318 |
| | $ | (2,190 | ) | | (26.3 | )% |
| | | | | | | | |
| | For the nine months ended | | | | |
| | September 30, | | September 30, | | Dollar | | Percent |
| | 2013 | | 2012 | | Change | | Change |
| | | | | | | | |
Service charges on deposit accounts | | $ | 1,699 |
| | $ | 1,625 |
| | $ | 74 |
| | 4.6 | % |
Trust service income | | 2,937 |
| | 2,828 |
| | 109 |
| | 3.9 | % |
Gains on loans held for sale | | 12,538 |
| | 15,088 |
| | (2,550 | ) | | (16.9 | )% |
Net gains on securities available for sale | | 397 |
| | 452 |
| | (55 | ) | | (12.2 | )% |
Commissions on investment sales | | 363 |
| | 389 |
| | (26 | ) | | (6.7 | )% |
Fees on mortgages held for sale | | 103 |
| | 143 |
| | (40 | ) | | (28.0 | )% |
Bank owned life insurance | | 367 |
| | 363 |
| | 4 |
| | 1.1 | % |
Other operating income | | 732 |
| | 585 |
| | 147 |
| | 25.1 | % |
Total non-interest income | | $ | 19,136 |
| | $ | 21,473 |
| | $ | (2,337 | ) | | (10.9 | )% |
Non-interest income decreased by 26.3% and 10.9% compared to the three and nine month periods ended September 30, 2012. The primary component of non-interest income was gains on mortgage loan sales, which decreased by 32.4% and 16.9% when compared to the three and nine month periods ended September 30, 2012. The decline in gains on mortgage loan sales was due to the decline in origination volume both in the purchase and refinance segments of the mortgage industry. Gains on mortgage loan sales included in the accompanying statements of income are presented net of originator commissions incurred to originate the loans.
Southern Trust Mortgage originated $189.48 million in mortgage loans during the quarter ended September 30, 2013 compared to $251.10 million during the quarter ended September 30, 2012, a decrease of 24.6%. Southern Trust Mortgage originated $590.4 million in mortgage loans during the nine months ended September 30, 2013 compared to $444.6 million during the nine months ended September 30, 2012, an increase of 32.8%. Management has taken measures to reduce overhead in order to align expenses with the decline in loan originations and revenue from mortgage sales. These measures include an approximate 10% reduction in headcount and planned reductions in salary expenses throughout the mortgage company.
Total revenue generated by our wealth management group, Middleburg Investment Group (“MIG”) was $1.12 million for the quarter ended September 30, 2013, an increase of 6.67% from $1.05 million for the quarter ended September 30, 2012. Total revenue generated by our wealth management group, MIG, was $3.3 million for the nine month period ended September 30, 2013, an increase of 2.6% from $3.2 million for the nine month period ended September 30, 2012. Middleburg Investment Group is comprised of Middleburg Trust Company, a wholly owned subsidiary of the Company and Middleburg Investment Services, which is a division of Middleburg Bank. Fee income is based primarily upon the market value of the accounts under administration. Total consolidated assets under administration by MIG were $1.50 billion at September 30, 2013 and $1.47 billion at September 30, 2012.
Net gains on securities available for sale were $23,000 and $397,000 during the quarter and nine month period ended September 30, 2013 compared to gains of $164,000 and $452,000 during the quarter ended and nine month period ended September 30, 2012.
In connection with the preparation of the financial statements included in this Form 10-Q, the Company concluded that there were no securities with other-than-temporary impairment within its portfolio as of September 30, 2013.
Other operating income was $78,000 during the quarter ended September 30, 2013 compared to $236,000 during the quarter ended September 30, 2012. Other operating income was $732,000 during the nine month period ended September 30, 2013 compared to $585,000 during the nine month period ended September 30, 2012. The primary reason for the decrease in other operating income during the third quarter 2013 was due to a non-recurring loss recorded in other income related to the disposition of property held for a potential branch location. The primary reason for the increase in other operating income during the nine month period was related to a one time adjustment to fair market value of certain mortgage loans. Other operating income includes credit card fees, data processing fees and other miscellaneous income during the reporting period.
Non-interest Expense
The following table presents dollar and percentage changes in components of non-interest expense for the three and nine month periods ended September 30, 2013 and September 30, 2012:
|
| | | | | | | | | | | | | | | |
Non-Interest Expense |
(in thousands) |
| | | | | | | | |
| | For the three months ended | | | | |
| | September 30, | | September 30, | | Dollar | | Percent |
| | 2013 | | 2012 | | Change | | Change |
| | | | | | | | |
Salaries and employee benefits | | $ | 7,750 |
| | $ | 7,276 |
| | $ | 474 |
| | 6.5 | % |
Net occupancy and equipment expense | | 1,820 |
| | 1,732 |
| | 88 |
| | 5.1 | % |
Advertising | | 318 |
| | 652 |
| | (334 | ) | | (51.2 | )% |
Computer operations | | 456 |
| | 322 |
| | 134 |
| | 41.6 | % |
Other real estate owned | | 416 |
| | 1,506 |
| | (1,090 | ) | | (72.4 | )% |
Other taxes | | 186 |
| | 203 |
| | (17 | ) | | (8.4 | )% |
Federal deposit insurance expense | | 149 |
| | 262 |
| | (113 | ) | | (43.1 | )% |
Other operating expenses | | 2,210 |
| | 1,883 |
| | 327 |
| | 17.4 | % |
Total non-interest expense | | $ | 13,305 |
| | $ | 13,836 |
| | $ | (531 | ) | | (3.8 | )% |
| | | | | | | | |
| | For the nine months ended | | | | |
| | September 30, | | September 30, | | Dollar | | Percent |
| | 2013 | | 2012 | | Change | | Change |
| | | | | | | | |
Salaries and employee benefits | | $ | 23,242 |
| | $ | 22,139 |
| | $ | 1,103 |
| | 5.0 | % |
Net occupancy and equipment expense | | 5,412 |
| | 5,265 |
| | 147 |
| | 2.8 | % |
Advertising | | 1,021 |
| | 1,399 |
| | (378 | ) | | (27.0 | )% |
Computer operations | | 1,375 |
| | 1,101 |
| | 274 |
| | 24.9 | % |
Other real estate owned | | 1,377 |
| | 2,666 |
| | (1,289 | ) | | (48.3 | )% |
Other taxes | | 565 |
| | 611 |
| | (46 | ) | | (7.5 | )% |
Federal deposit insurance expense | | 683 |
| | 781 |
| | (98 | ) | | (12.5 | )% |
Other operating expenses | | 6,666 |
| | 6,501 |
| | 165 |
| | 2.5 | % |
Total non-interest expense | | $ | 40,341 |
| | $ | 40,463 |
| | $ | (122 | ) | | (0.3 | )% |
| | | | | | | | |
Total non-interest expense in the third quarter of 2013 decreased by $531,000 or 3.84% compared to the quarter ended September 30, 2012 and remained relatively unchanged for the nine month periods ended September 30, 2013 and September 30, 2012.
The increase in salaries and employee benefit expenses of 6.51% for the three month period and 4.98% for the nine month period was the result of an increase in full-time equivalent employees from 363 as of September 30, 2012 to 386 as of September 30, 2013, primarily the result of increased staffing related to the opening of the Richmond financial service center.
Expenses related to Other Real Estate Owned (OREO) decreased by $1.10 million compared to the quarter ended September 30, 2012 and decreased by $1.3 million when comparing the nine month periods September 30, 2013 to September 30, 2012. The decreases in expenses were primarily due to decreases in legal expenses related to foreclosure and losses on the sales of these assets. Changes in the level of OREO related expenses are determined by the volume of OREO properties recorded during the
reporting periods, valuation allowances associated with the fair market value of the properties, the condition and maintenance of the properties and losses incurred on the sale of properties.
Advertising expenses declined $334,000 or 51.2% from the quarter ended September 30, 2012 and declined 27.0% for the nine month period ended September 30, 2013 compared to the same period in 2012. Advertising expenses are cyclical and are impacted by product offerings and promotions, new financial service center locations and community outreach. The primary reasons for lower advertising expenses during the three and nine month periods ended September 30, 2013 were due to the increased advertising expenses in 2012 related to the Bank's entrance into the Richmond market.
Computer operations expenses increased 41.6% from the quarter ended September 30, 2012 and increased 24.9% for the nine month period ended September 30, 2013 compared to the same period of 2012. The primary reasons for the increase in expenses for the three and nine month periods ended were due to the higher costs related to computer maintenance, additional expenses related to a new anti-money laundering monitoring and tracking software added in 2013, and continued increases in expenses related to our on-line banking products.
Federal deposit insurance expenses decreased 43.1% and 12.5% from the quarter and nine month periods ended September 30, 2012, respectively. The primary reason for decreased expenses in this category was related to the refund of the Bank's unused prepaid FDIC insurance premium based on the reduction of factors used in the determination of this assessment. This refund decreased related expenses proportionately.
Other operating expenses increased $327,000 or 17.4% compared to the quarter ended September 30, 2012 and $165,000 or 2.5% compared to the nine month period ended September 30, 2012. The increase in other operating expenses, when comparing quarter end September 30, 2013 to September 30, 2012, was primarily related to an increase in recruiting expenses for senior level positions, an increase in the Bank's accrual for unfunded commitments, and normal client related losses.
The Company’s efficiency ratio was 81.19% for the third quarter of 2013, compared to an efficiency ratio of 69.27% for the third quarter of 2012. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. The Company calculates its efficiency ratio by dividing non-interest expense (adjusted for amortization of intangibles, other real estate expenses, and non-recurring one-time charges) by the sum of tax equivalent net interest income and non-interest income excluding gains and losses on the investment portfolio. The tax rate utilized in calculating tax equivalent amounts is 34%. The Company calculates and reviews this ratio as a means of evaluating operational efficiency.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2013 was $13.4 million, or 1.87% of total portfolio loans, compared to $14.3 million, or 2.02% of total portfolio loans at December 31, 2012. The Company recorded a loan loss provision of $3,000 for the three months ended September 30, 2013, compared to a provision for loan losses of $635,000 for the three months ended September 30, 2012. Non-accruals as a percentage of total loans have decreased from 3.28% in the period ended September 30, 2012 to 2.87% in the period ended September 30, 2013. There were $636,000 in loans past due 90 days or more and still accruing at September 30, 2013, compared to $1.0 million at December 31, 2012. Non-performing loans were $26.0 million at September 30, 2013, compared to $27.8 million at December 31, 2012. Management believes that the allowance for loan losses was adequate to cover credit losses inherent in the loan portfolio at September 30, 2013. Loans classified as loss, doubtful, substandard and special mention are adequately reserved for and are not expected to have a material impact beyond what has been reserved. Approximately $2.6 million has been included in the allowance for loan losses related to total restructured loans.
Capital Resources
Total shareholders’ equity at September 30, 2013 and December 31, 2012 was $115.2 million and $117.1 million, respectively. Total common shares outstanding at September 30, 2013 were 7,089,091.
At September 30, 2013, the Company’s Tier 1 and total risk-based capital ratios were 14.6% and 15.8%, respectively, compared to 14.1% and 15.4% at December 31, 2012. The Company’s leverage ratio was 9.4% at September 30, 2013 compared to 9.1% at December 31, 2012. The Company’s capital structure places it above the well capitalized regulatory guidelines, which enables it to take advantage of business opportunities and indicates it has the resources to protect against risk inherent in its business.
Liquidity
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, short-term investments, securities classified as available for sale and loans and securities maturing within one year. As a result of the Company’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.
The Company also maintains additional sources of liquidity through a variety of borrowing arrangements. The Company maintains federal funds lines with large regional and money-center banking institutions. These available lines totaled $24.0 million, none of which were outstanding at September 30, 2013. At September 30, 2013 and December 31, 2012, the Company had $35.0 million and $34.0 million, respectively, of outstanding borrowings pursuant to repurchase agreements.
The Company has a credit line at the Federal Home Loan Bank of Atlanta with a remaining borrowing capacity of $78.1 million as of September 30, 2013. This line may be utilized for short and/or long-term borrowing. The Company utilized the credit line for both overnight and long-term funding throughout the first nine months of 2013. Southern Trust Mortgage has a revolving line of credit with a regional bank having a credit limit of $24.0 million. This line is primarily used to fund its loans held for sale. Middleburg Bank guarantees up to $10 million of borrowings on this line. At September 30, 2013, the line had an outstanding balance of $5.5 million and is included in total short-term borrowings on the Company’s balance sheet.
At September 30, 2013, cash, interest bearing deposits with financial institutions, federal funds sold, short-term investments, loans held for sale and securities available for sale were 44.9% of total deposits.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments to extend credit (excluding standby letters of credit) increased $26.5 million to $104.8 million at September 30, 2013 compared to $78.3 million at December 31, 2012. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent expected future cash flows. Standby letters of credit were $2.7 million at September 30, 2013 representing a decrease of $744,000 from December 31, 2012.
Contractual obligations, representing FHLB advance obligations, operating leases, and capital notes, increased $2.9 million to $118.9 million at September 30, 2013 compared to $116.0 million at December 31, 2012. These results do not include changes in certificates of deposit and short-term borrowings. Additional information on commitments to extend credit, standby letters of credit and contractual obligations is included in the Company’s 2012 Form 10-K.
Caution About Forward Looking Statements
Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.
Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:
| |
• | changes in general economic and business conditions in the Company’s market area; |
| |
• | changes in banking and other laws and regulations applicable to the Company; |
| |
• | maintaining asset qualities; |
| |
• | risks inherent in making loans such as repayment risks and fluctuating collateral values; |
| |
• | changing trends in customer profiles and behavior; |
| |
• | maintaining cost controls and asset qualities as the Company opens or acquires new branches; |
| |
• | changes in interest rates and interest rate policies; |
| |
• | competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources; |
| |
• | the ability to continue to attract low cost core deposits to fund asset growth; |
| |
• | the ability to successfully manage the Company’s growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future; |
| |
• | reliance on the Company’s management team, including its ability to attract and retain key personnel; |
| |
• | demand, development and acceptance of new products and services; |
| |
• | problems with technology utilized by the Company; |
| |
• | maintaining capital levels adequate to support the Company’s growth; and |
| |
• | other factors described in Item 1A, “Risk Factors,” included in our quarterly reports on Form 10-Q and the 2012 Form 10-K. |
Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The Company’s primary market risk exposure is interest rate risk, though it should be noted that the assets under administration by Middleburg Trust Company are affected by equity price risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out asset/liability management policies to the Asset/Liability Committee (“ALCO”) of the Bank. In this capacity, ALCO develops guidelines and strategies that govern the Company’s asset/liability management related activities, based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company’s financial instruments also change, affecting net interest income, the primary component of the Company’s earnings. ALCO uses the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The results of the simulation are dependent upon assumptions and parameters within the model used which change from time to time based on historical interest rate relationships, current market conditions, and anticipated future market conditions. While ALCO routinely monitors simulated net interest income sensitivity over a rolling two-year horizon, it also employs additional tools to monitor potential longer-term interest rate risk. The model prepared for September 30, 2013 did not include the assets and liabilities of Southern Trust Mortgage.
The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s balance sheet excluding the assets of Southern Trust Mortgage. The simulation model is prepared and updated four times during each year. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 basis point (bp) upward shift and a 200 basis point downward shift in interest rates. A parallel shift in rates over a 12-month period is assumed. The following table reflects the Company’s net interest income sensitivity analysis as of September 30, 2013 and December 31, 2012.
|
| | | | |
| | Estimated Net Interest Income Sensitivity |
Rate Change | | As of September 30, 2013 | | As of December 31, 2012 |
+ 200 bp | | 0.2% | | 0.4% |
- 200 bp | | (11.5)% | | (11.1)% |
At September 30, 2013, the Company’s interest rate risk model indicated that, in a rising rate environment of 200 basis points, net interest income could increase by 0.2% on average over the next 12 months. For the same time period the interest rate risk model indicated that in a declining rate environment of 200 basis points, net interest income could decrease by 11.50% on average over the next 12 months. While these numbers are subjective based upon the assumptions and parameters used within the model, management believes the balance sheet is properly structured to minimize interest rate risk in the future.
Based upon a September 30, 2013 simulation, the Company could expect an average positive impact to net interest income of $26,000 over the next 12 months if rates rise 200 basis points. If rates were to decline 200 basis points, the Company could expect an average negative impact to net interest income of $4.2 million over the next 12 months.
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, including the nature and timing of interest
rate levels such as yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment or replacement of asset and liability cash flows. Management routinely monitors these assumptions however the Company cannot make any assurances about the predictive nature of the assumptions, including how customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to factors such as prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change, caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in response to, or in anticipation of, changes in interest rates.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.) Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company, including its subsidiaries, is a party or of which the property of the Company is subject.
Item 1A. Risk Factors
Our operations are subject to many risks that could adversely affect our future financial condition and performance and, therefore, the market value of our securities. The risk factors that are applicable to us are outlined in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes in our risk factors from those disclosed in this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
|
| | |
31.1 |
| Rule 13a-14(a) Certification of Chief Executive Officer |
|
| | |
31.2 |
| Rule 13a-14(a) Certification of Chief Financial Officer |
|
| | |
32.1 |
| Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350 |
|
| | |
101 |
| The following materials from the Middleburg Financial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | |
| | | MIDDLEBURG FINANCIAL CORPORATION |
| | | | (Registrant) | |
| | | | | |
| | | | | |
| | | | | |
Date: | November 8, 2013 | | /s/ Gary R. Shook | |
| | | Gary R. Shook | |
| | | President & Chief Executive Officer |
| | | | | |
| | | | | |
| | | | | |
Date: | November 8, 2013 | | /s/ Raj Mehra | |
| | | Raj Mehra | |
| | | Executive Vice President |
| | | & Chief Financial Officer |
EXHIBIT INDEX
Exhibits
|
| |
| |
31.1 | Rule 13a-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a) Certification of Chief Financial Officer |
32.1 | Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350 |
101 | The following materials from the Middleburg Financial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. |